Eurozone:
- Leading indicators bounced again in March indicated rising activity in the manufacturing and services sectors.
In March, the purchase manager indexes (PMIs), which belong to the most prominent business surveys for the Euro Area, skyrocketed for another month and indicate strong expansion in economic activities (Figure 1). The composite index rose more than expected by analysts from 56.0 to 56.7 driven by both increasing manufacturing (from 55.4 to 56.2) and services results (from 55.5 to 56.5). The composite index has now been increasing for six consecutive months. On a cross-country level, the PMI indicators rose in Germany (from 56.1 to 57) as well as in France (from 55.9 to 57.6). The strong rises in business surveys have yet to be confirmed by real activity that is published with a time lag. In January, Eurozone industrial production increased by 0.6 % (y/y, wda) and retail sales rose by 1.2 % (y/y), while construction fell by 6.2 % (y/y). Real-time GDP tracking – capturing business cycle-relevant data – suggests around 0.6 % quarterly GDP growth in Q1 2017 in the Euro Area.
Austria:
- Household lending as well as deposit creation inch up amid low interest rates.
Interest rates have reached historically low levels in Austria. Private borrowers reacted such that they secure long-term fixed interest rates at very low level as was in particular the case for financing of house purchases. According to the Austrian National Bank (OeNB), the average interest rates for new credit and deposits for firms and private households were 1.8 % and 0.3 % in December 2016.
The interest rate differential between fixed long-term interest rates and initially one year maturity has been declining. In December, the interest rate for new lending for house purchase with a fixed maturity of five years was 2.1 % and 37 basis points higher than the rate for a one year term loan.
Growth in lending to households accelerated in 2016 and was 3.2 % annually in December (Figure 2). The dynamic development was mostly due to lending for house purchases (4.8 %), while consumer credit continued to contract (-2.3 %). Loans to non-financial corporates increased moderately by 1.5 % (y/y) in December.
Meanwhile, the volume of overnight deposits has also been rising despite very low interest rates in 2016. Household bank deposit creation remained strong (Figure 3) increasing by 9.9 bln or EUR 4.4 % in 2016. The trend was predominately driven by growth in overnight deposits which rose by 15.7 bln EUR or 14.5 %. At the same time, non-financial corporates increased their deposit holdings by 6.5 bln EUR or 11.9 % annually until December 2016.
In Q3 2016, total household deposits were 257.9 % of nominal gross domestic product. Following the financial crisis, bank deposits as % of GDP had reached a peak at 280.0 % of GDP likely due to a precautionary savings motive and it declined continuously afterwards (Figure 4). Deposits of non-financial corporates have been fairly stable around 70 % of GDP during the same period. While the OeNB presentation says that deposits grow despite historically low interest rates, in fact, deposits have returned to their pre-crisis level (as % of GDP) in recent years.
However, we had argued last year (UCM Weekly as of 31st October) that households increase savings because of the low interest rates earned on overnight and savings deposits. Exploiting cross-country and time-varying data from the Euro Area, we provided some surprising statistical evidence for the period between 2013 and 2015 (Table 1). A decrease in the interest rate by 0.1 percentage points is statistically significant associated with an increase in the savings rate by more than one percentage point. Households save more observing a decrease in the (nominal) interest rate on their bank account. Regressions explained about 30 % of the variation in the savings rates.
In summary, the data seems to suggest that precautionary motives for holding liquidity and risk aversion have waned since the financial crisis. The recent rise in private deposits might be attributable to historically low interest rates and portfolio reallocation. Rising money demand might also be attributable to the desire to hold transactions money, i. e. with the aim to spend for consumption or to invest once market yields start to rise.