The ECB's monthly summary of monetary developments in the euro area offered some crumbs of comfort, as both the narrow M1 and broad M3 money aggregates expanded faster than expected, bolstering hopes that the massive liquidity injections around the turn of the year were finally gaining traction.
But analysts said the underlying country-by-country data continued to point to serious problems in credit supply and demand, hobbling the growth outlook and adding to pressure for further stimulus from the central bank.
The data broadly corroborate the findings of the ECB's quarterly Bank Lending Survey published Wednesday, which showed both increasing constraints on banks from the sovereign debt crisis, and weak demand for loans both from firms and households.
The overall volume of lending to businesses fell by 2.8 billion euros ($3.4 billion), while lending to households edged up by a modest 5 billion euros. In annual terms, lending to the private sector fell by 0.2%, compared to a 0.1% drop in May.
"All in all, today's M3 figures suggest that -- despite the acceleration in headline figures -- loans activity remains very subdued, reflecting the weakness in domestic demand," Newedge Strategy economist Annalisa Piazza wrote in a note to clients."
Piazza noted that country-by-country data on lending and on deposit flows at southern European banks continued to show "extreme weakness" in the region, something masked by the aggregated data.
Combined lending to households and companies fell in Greece, Portugal and, worryingly, in Italy, the euro zone's third-largest economy. In Spain, too, corporate credit contracted for the ninth month in a row, although retail lending surprisingly bucked a six-month sequence of declines.
In addition to weak demand for credit, banks in the financially stressed parts of the euro zone are increasingly struggling to keep funds from depositors. Private-sector deposits at Greek banks fell 4.1% on the month to their lowest level in seven years, while those at Spanish banks fell 0.5% to a four-year low. Cyprus which, like Spain, has requested euro zone assistance to recapitalize its banks, saw a 1.1% drop in deposits.
Economists saw the data as steadily increasing the pressure on the ECB for more action to revive the economy, although they said it was not likely to come immediately. IHS Global Insight's Howard Archer said he expected the ECB to cut its benchmark rates again by October, and said "the case is mounting" for the ECB to experiment by cutting its deposit rate below the current zero rate, in an attempt to squeeze the liquidity currently sitting with banks out into the broader economy.
Christian Schulz, an economist with Berenberg Bank in London, said in a note that "more targeted help for southern Europe would be needed" from the ECB, rather than another generalized stimulus through lower interest rates.
Schulz pointed out that the flood of data released contained at least some rays of hope. Growth in the narrow M1 aggregate of cash in circulation and sight deposits--a reasonably reliable indicator of economic activity--accelerated for the second straight month to 3.5%, while the broader M3 measure accelerated to 3.2%, above analysts expectations' of a 2.9% increase. The less volatile three-month average of M3 increased 3.0%, also ahead of expectations, but still well below the ECB's "reference value" of 4.5%, which it considers consistent with stable prices.
Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com and Margit Feher at margit.feher@dowjones.com
