Canada’s Money Supply Growth Is Pointing To A Slower Economy

Canadian households are up to their neck in debt, and it’s showing in the country’s money supply. Bank of Canada (BoC) numbers show the M1+, a measure of the country’s “cash,” is seeing growth slow in February. All signs point to this number heading even lower, and taking economic growth with it as well.

What’s The M1+?

The M1+ is a narrow measure of Canada’s money supply. This number includes currency outside of banks, chequable deposits at chartered banks, trust and mortgage loan companies, and credit unions. In short, it’s anything a person or business can spend in Canadian dollars, with zero to no notice. In the BoC’s own words, the M1+ provides “important information about the economy.”

Important? Sounds important… but how? The BoC manages the growth rate of money indirectly, mostly through interest rate changes. When rates rise, people borrow less and pay more to service debt. The result is less “cash,” which shows up on the growth rate of the M1+. When rates drop, people borrow more and pay less to service debt. More cash for servicing means less cash to spend, and vice versa. The impact is first felt in purchases that usually need financing – like a home or car.

Why Look At The Narrow Supply, Instead of Broad?

The M1+ is one of the more narrow measures of the money supply, as opposed to the M2+ that’s more popular. The M2+ includes more streams of money creation, but doesn’t give us the same insights. M1+ provides insights on future levels of productivity. This helps us understand the direction of things like gross domestic product (GDP). The M2+ includes non-productive credit growth as well, so it’s a better indicator of inflation. High levels of economic productivity are not the same as credit growth.

Slowest February For M1+ Growth Since 1995

The annual pace of growth for the M1+  is slowing. The 12 month pace of growth fell to 3.7% in February, down 11.9% from the month before. This represents a decline of 45% when compared to the same month last year. Yes, it’s really slow growth being printed. In fact, this is the slowest February since 1995.

Canadian M1+ 12 Month Percentage Change

The 12 month percent change of Canada’s M1+.

Source: Bank of Canada, Better Dwelling.

Short-Term Trend Points To Even Lower M1+ Growth

Annualizing a short-term trend and comparing it to a long term, is one way to forecast numbers. A short-term measurement, like 3 months, is made and then projected as if it were the whole year. The 12 month annual pace of growth can’t rise without bigger short-term numbers. For the 12 month to shrink, short-term measurements need to be lower. In short, picture the 12 month trend as chasing those annualized shorter trends. In our last M1+ article, we used the 3-month annualized pace of growth to correctly predict a short-term rise through the winter. Yeah, it’s pretty fly.

The short-term trend is currently pointing to lower annual growth from M1+. The 3 month annualized trend fell to -0.1%, 102% lower than last year. The trend is pointing to a contraction for the 12 month trend. In a truly free market environment, this would be very likely. However, it would be surprising for Canada’s central bank to not step in with a rate cut if this approaches.

Canadian M1+ 3 Month Percentage Change (Annualized)

The 3 month percent change of Canada’s M1+, annualized.

Source: Bank of Canada, Better Dwelling.

Canada’s M1+ is back to shrinking annual growth, with negative growth being observed over the past few months. Annual growth falling to nil without a rate cut is highly unlikely, but that would not be as positive as it sounds. When debt levels are this high, the ability for a rate cut to provide more stimulus is questionable. Odds are the stimulus would be consumed by deleveraging borrowers, not towards productive expansion. Possibly at the expense of a weaker loonie.

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