Companies and households across the euro zone increased their deposits at banks by €184 billion in July, as money supply in the bloc rose by the fastest annual rate since the 2008 financial crisis, according to European Central Bank (ECB) data.
Total deposits held by euro zone banks rose 10.3 per cent in the year to July, the ECB said on Thursday – climbing above €12 trillion for the first time and underlining how many households and companies have reacted to the economic fallout from the coronavirus pandemic by saving more money.
Businesses put money aside at a record annual rate in the year to July, as deposits by non-financial companies rose 20.4 per cent. Household deposits increased 7.4 per cent.
Overall money supply in the euro zone rose 10.2 per cent in the past year as deposits and currency in circulation both increased rapidly – a pace not seen since the last global financial crash 12 years ago.
The sharp rise in business and consumer savings underlines how central banks and governments have flooded the financial system with cheap money in a bid to prevent the global recession caused by the virus from turning into a damaging credit crunch.
The figures suggest that companies are worried about their outlook despite a nascent rebound in the economy after most coronavirus lockdowns were lifted, indicating that the sharp drop in business investment since the pandemic hit is likely to weigh on the recovery.
Some economists regard the extra consumer deposits as pent-up demand that could be spent as lockdowns are lifted, known as involuntary saving, while others see them as a safety net put aside by households for an uncertain future, referred to as precautionary saving.
Despite the record post-war recession, euro zone banks have continued to lend to households and businesses.
Credit
Overall credit to the private sector grew at an annual rate of 5.3 per cent, its fastest pace for over a decade. Lending to euro zone households rose 3.3 per cent over the year, while loans to non-financial companies grew 6.5 per cent. Lending to governments increased by a record annual rate of 5.7 per cent.
The ECB said the annual growth rate of the M1 measure of money supply, which comprises currency in circulation and overnight deposits, increased by a record rate of 13.5 per cent in the year to July.
The massive injection by central banks and governments of cheap money into the economy has led some investors and economists to question whether it could push up inflation.
However, the rate of price growth has slowed sharply since the pandemic hit, and most economists expect it will remain well below the ECB’s target of just below 2 per cent for several years to come, even as the economy rebounds from recession. – Copyright The Financial Times Limited 2020
