The European Central Bank determines the growth rates of monetary aggregates in the euro area by analysing the number of transactions rather than solely relying on a comparison of end-of-period outstanding amounts. This approach provides insights into the economic activity within the euro area, encompassing loans and deposits made by households and the private sector.

Both M1, also known as “narrow money,” representing the most liquid forms of money readily accessible for transactions such as currency in circulation and overnight deposits, and M3, also known as “broad money,” encompassing M1 along with other less liquid assets like deposits with a maturity of up to two years, repurchase agreements, money market fund shares and debt securities with a maturity of up to two years, experienced continued contraction in May 2023.

According to data from the ECB, the annual growth rates of the broad monetary aggregate M3 decreased to 1.4% in May 2023 from 1.9% in April.

Meanwhile, the narrower monetary aggregate M1, which is a component of M3, experienced a decline to -6.4% in May compared to -5.2% in April. This represents the lowest level for M1 aggregate recorded since data recording began in 1982.

Furthermore, the annual growth rates of deposits placed by households, non-financial corporations and non-monetary financial corporations (excluding insurance corporations and pension funds) all exhibited a decline in May compared to April. This decline probably indicates an overall reduction in the availability of money and credit in the economy.

Taken together, these factors indicate a continued decline in economic activity in the euro area.

Lending and borrowing

The annual growth rates of credit to households experienced a decline to 0.9% in May compared to 1.5% in the previous month.

Similarly, credit growth to general governments showed a decrease, with an annual rate of -2.2% in May, as opposed to -0.8% in April. Additionally, the annual growth rate of credit to the private sector decreased to 2.2% in May from 2.5% in April.

Furthermore, the annual growth rate of adjusted loans to the private sector, which accounts for factors like loan sales, securitisation and notional cash pooling, dropped to 2.8% in May from 3.3% in April.

Among the other sectors borrowing, the adjusted loans annual growth rate to households and non-financial corporations declined to 2.1% and 4.0% in May compared to 2.5% and 4.6% in April, respectively.

This decline in lending and borrowing activities across different sectors in the euro area indicates a broader reduction in spending and investments, suggesting a decrease in economic activity and, to some extent, an environment of economic uncertainty.