Relative monetary trends suggest that Eurozone GDP outperformance in the first quarter of 2011 will give way to significant underperformance later in 2011.

Eurozone GDP rose by 0.8% in the first quarter versus 0.4% in the US and 0.5% in the UK, with Japanese figures this week expected to show a contraction. Economic performance reflects monetary trends six to 12 months earlier. In the year to June 2010, real narrow money, M1, rose by 7.7% in Euroland versus 3.5% and 2.7% in the US and Japan respectively.

Monetary indicators, however, have since performed a U-turn. Real M1 rose by 8.4% and 5.0% in the US and Japan in the year to April but by only 0.3% in the Euroland in the year to March (the latest available month). This suggests strong economic growth in the US and Japan in late 2011 while Euroland slows sharply or even contracts.

Within the Eurozone, real M1 deposits fell by 4.2% in peripheral economies (i.e. Greece, Ireland, Italy, Portugal and Spain) in the year to March while rising by 3.4% in the "core" (i.e. Austria, Belgium, France, Germany, Luxembourg and the Netherlands). The contraction in the periphery is on the same scale as occurred before the 2008-09 output slump.

In the core grouping, the annual rise of 3.4% compares with 11.9% in June 2010 while real M1 has declined over the last six months. Eurozone economic weakness later this year, therefore, is likely to reflect a big slowdown in the core, including Germany, as well as stagnation or renewed recession in the periphery.