Canada

Canada’s Minor Interest Rate Hikes May Be Setting Up Major Economic Problems

One of Canada’s monetary measures is showing interest rates will be a drag on the economy. Bank of Canada (BoC) numbers show slowing growth in the M1+, a measure of “cash.” The slowing growth occurs after interest rate hikes, as more money is used to service debt. The slowdown is often a sign that slowing economic growth will follow.

Canada’s M1+

The M1+ is one of the monetary aggregates used to measure the money supply. This indicator includes currency outside of banks and chequable deposits – a.k.a. easily accessible cash. Someone always points out in the comments that people don’t hold cash, because they use credit cards! The credit card company holds cash, that is transferred to the merchant’s account when you spend. So that cash is mostly included as well.

The M1+ is an important indicator, since it tells us about future production in the economy. When interest rates rise, they bring up the cost of borrowing. Consumers and businesses hold onto less cash, since the cost of servicing rises. If the growth falls too quickly, it lowers the amount of cash that would be used for spending and investing. Less spending and investing means less economic growth, which is bad if it happens too fast.

M1+ Growth Falls To Lowest Levels Since 2003

If slowing growth of the M1+ is bad, then Canada is in for some turbulence. The annual rate of growth fell to 3.9% in July, down over 60% from the year before. This is the lowest level of growth since October 2003 – a strange period for the Canadian economy. Sometimes it helps if we hop in the time machine to see what was happening then.

12 Month Change of Canadian M1+

The annual percent change in M1+.

Source: Bank of Canada, Better Dwelling.

In 2003 the BoC found Canada was experiencing lower than forecasted economic growth. In the April 2003 monetary report, they noted that energy costs pushed inflation to new highs. That was enough to make them ambitious about the economy and inflation. They made minor rate hikes, to “cool” the rising inflation. By October 2003, they noted weaker than forecasted expectations, as inflation fell below target. The following year they aggressively slashed interest rates to get inflation back up. Central bankers be cray-cray.

Expect It To Go Much Lower

The pace of growth could fall even lower, if we look at the short-term trend. Annualizing a trend is a common method for forecasting future growth. Really it’s just taking short-term trends, and projecting it as though it were the full year.

Using the three month annualized trend, we’re seeing it fall to a fraction. The three month annualized trend reached 0.7% in July, down 89.85% from the same period last year. This doesn’t mean M1+ growth will fall this low, but it will push lower. The annual rate will fall until the 3 month annualized rises above it.

Canadians appear to be more sensitive to rate hikes than experts are letting on. After only mild interest rate hikes, we’re seeing the the broad measure of “cash” plummet. Slowing M1+ typically precedes slowing economic productivity, so we’re likely overshooting growth. Although we think we heard a few people say it’s different this time. Cue eye roll.

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17 Comments

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  • Mk 9 months ago

    Good observation. 2003, it looks like they raised rates by 40bps before having to slash them 120 bps to continue the pump. All to cool rising energy prices at the time, which is what we’re seeing today. If only they would give it to us straight once in a while.

    • Walt 9 months ago

      Canada cuts 120 bps here, we’ll be almost at ZIRP. I’m not sure which economies have better outlooks, but Canada is setting up a scary one.

  • Trader Jim 9 months ago

    Canada is very bullish about the economy here, which is a bad sign. You would always rather be surprised to the upside, than to the downside. Setting up the ambitious growth that was fuel by debt and pretending it’s going to go on forever is going to leave quite the hangover.

  • James Wolfe 9 months ago

    How long can this continue…stock market bubbles, massive government and personal debt…housing bubbles everywhere…can they even raise interest rates any more…? How much debt can the government take on…what a mess…when daddy was PM, interest rates went through the roof, can this happen again…mmmmmmmmm? POP!!!

    • John 9 months ago

      Everything you mentioned took more than a couple years to develop… so your political slant is baseless and meaningless. Further, this isnt a political blog so political opinion has no place here.

  • SUMSKILLZ 9 months ago

    Maybe a silly question, but if Canada looses its NAFTA agreement with the USA, and free trade with the U.S. is rescinded, what will that do to interest rates in Canada? Will the effect likely be minor, or huge? I realize Congress is unlikely to support a tearing up of NAFTA, but what if it did?

  • NJ 9 months ago

    BOC is kinda caught in between
    They’ve no choice but to raise
    Big banks started securing their forts a while ago
    Poor people are gonna pay for this mess.

    • Lp 9 months ago

      @nj

      What you mean by BOC has no choice ?

    • Lp 9 months ago

      No choice ?

      • AJ 9 months ago

        The BOC has to keep pace with the Fed. Else the loonie goes to hell
        If they don’t keep pace then the loonie tanks, our imports get expensive and inflation rises due to supply side issues and the BOC will have no choice but to increase rates.
        Hence BOC can take the bitter medicine now or kick the can down the road

  • CJ Ray 9 months ago

    Looks like the rather sensitive realturds are opining today. Sometimes the truth really hurts.

  • Anthony 9 months ago

    I’m tracking US10Y – US2Y yield spread and it’s nearing the low level seen in 05. When the recession hits and the curve reverses like it did in the full swing of 2007-2008, that’s when you want to buy cheap assets (houses, equity).

    Raise cash now.

    • Anthony 9 months ago

      https://www.tradingview.com/x/4yZwuUR3/

      Here’s the chart for reference.

    • Vijay Stevens 9 months ago

      Astute observation, IMHO. Get ready for a real doozy of a ride. Very limited upside and a huge downside. The expected return makes this decision sooooo easy!

      • Bluetheimpala 9 months ago

        “The expected return makes this decision sooooo easy!”….really? Equivalent of posting on a #metoo blog post about ‘how honies be wantin’ the biiigg D’…seriously? I strongly suggest you re-consider your attitude towards housing an an investment because if you think metal supercycles are a killer (want to wait 20 years to make $ off of silver…way to go champ!), housing is close to that and worse because some markets never recover as demographics shift. Should RE be open to money and investors? Yes! There are definitely professional investors who do well. Is anyone who can scrape together a down payment through dubious means suddenly an investor? Yes!…lol, fuck no. Imma throw it out they ‘V to the Stevie’ that you fall into the latter. Maybe you have a couple houses and a condo, maybe a 25acre parcel…way to go champ! Professional RE investors understand what has happened and what will ensue; they are waiting around to eat your lunch for pennies on the dollar and then 10 years later, sell it back to you at a markup because ‘land scarcity/immigration/mogwai/new york of the north/epicenter of hamster pants/etc.’ Tick tock. BD4L.

    • Wolf of Shaughnessy 9 months ago

      The difference between making a few bucks and making a lot of money is doing the opposite. Make middle class moves, win middle class prizes

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