Canada’s Money Supply Growth Is Slowing, and That’s Bad For Economic Activity

Near record low interest rates may still be too high for highly indebted Canadian households. Bank of Canada (BoC) numbers show the growth of the M1+ money supply fell to a multi-year low in March. The decline of this measure is typically indicative of slowing future economic activity.

The M1+

The M1+ is a narrow measure of Canada’s money supply, that includes readily available currency. This number includes currency outside of banks, chequable deposits at chartered banks, trust and mortgage loan companies, and credit unions. If they’re Canadian dollars, and you can spend it with no prior notice, it’s measured here. The BoC uses this number to pull “important information about the economy.” The ambiguous statement means it helps us to understand future levels of productivity.

Central banks manage money growth indirectly through rate changes. The M1+ is a measure that gives insight into how households and businesses adjust to those changes. When rates rise, people borrow less and use more cash for debt service. The result is slowing M1+, as less cash kicks around. When rates get cut, people borrow more and pay less to service debt. Less money to service debt, means more to spend and vice versa. The impact of falling M1+ is usually most apparent in goods that need large amounts of financing. Housing and cars are the most obvious ones.

The Growth Rate of Canada’s M1+ Fells Over 45%

Canada’s M1+ has seen the pace of growth drop to a multi-year low. The annual pace of growth dropped to 3.5% in March, down 45% when compared to last year. This is the lowest number since October 2003, when it last matched this number. For the month of March, this is the weakest since 1995, when it made a negative print.

Canadian M1+ 12 Month Percentage Change

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

Source: Bank of Canada, Better Dwelling.

Growth Is Heading Towards The Lowest Level Since The 90s

By annualizing the 3 month pace of growth, we can see this number is likely to head even lower. Annualizing recent data is a common method analysts use to forecast near-term changes. They do this by measuring a few recent data points, and project them as though it were the whole year. For the 12 month growth to change direction, a smaller period number would have to see greater growth. If it’s not greater, the direction of the long-term trend won’t change without a miracle.

The shorter annualized pace of growth turned negative, indicating slower growth ahead. The 3-month annualized pace of M1+ growth fell to -1.1%, a decline of 135.48% from last year. Yes, it was negative – and the largest negative number since January 2003, when it was -1.9%. Way back in 2003, January’s drop helped to pull the annual pace of growth down to the October 2003 low we just matched. March 2019’s negative 3-month annualized print makes it likely we’ll see lower than 3.5% growth in April. If it does drop below 3.5, the M1+ will be at growth levels not seen since the mid-1990s.

Canadian M1+ 3 Month Percentage Change (Annualized)

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

Source: Bank of Canada, Better Dwelling.

The M1+ growth rate is falling, forecasting a slowdown of future economic productivity. This is the slowest pace of growth since 2003, and all signs point to it falling even further. Worth a mention is  Canada faced a similar economic picture in 2003. During that time, the BoC was anticipating a hike as well, but instead had to cut rates to avoid a recession print.

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  • Jason Chau 5 years ago

    Not sure if you’re not saying it because it’s obvious, or because you’re not trying to stir things up in the real estate industry, but this shows the most obvious sign – THE SLOWDOWN IS NOT B-20 RELATED. At very best, it’s only a light indication.

    People normally build large cash reserves when they’re getting ready to buy a new house. I know if you’re a financial manager, you’re thinking – why wouldn’t they put it in GICs or bonds??? It’s just not how people work, they like seeing that little number uptick towards their goals.

    If the M1+ is dropping, it could mean there’s a lot fewer buyers saving up for that big first-time moment. You have no property ladder without a new crop of bachelor buyers.

  • Mike Chan 5 years ago

    I think what this article means to say is dirty money is drying up.

    So they need easy credit for first time buyers to keep the ponzi scheem going. 🙂

    Maybe dirty money will find another way back into the casinos and real estate market, but for now I think there is too much public interest in making it more difficult for criminals to launder their money this way.

  • Julie Cazzin 5 years ago

    Yes, and I can tell times are tough when I see real estate agents up to their old tricks. Went by a house for sale on my sister’s street last weekend. Everyone (4 people) showed up at a ten-minute window to make it look like there was tons of competition to buy this place. I felt sorry the prospective buyers who just seemed overwhelmed by the nonsense. They all quickly left.

    I’ve told my kids to keep renting, save/invest a little more, and enjoy their life of freedom. You can make the numbers work without getting caught in this real estate slippery slope that has nowhere to go but down…

    • SUMSKILLZ 5 years ago

      My favorite is when the listing pictures have full professional staging & lighting photoshopping, but when you visit, the place is empty. You can see all the wear and tear on finishes, the appliances are one home, even the furnace, A/C unit and hot water heater were gone because they were rentals. Of course the agent spun it as a plus, because you could customize things to your taste.

      One home came with a car the owner abandoned and left in the garage. I did a background check on the fancy car and it had a big lien on it. The agent claims to have not known this fact and asked for copies of my documents. I said sure, but I’ll need $60 cash. He was not amused.

      • Smaug 5 years ago

        The best (i.e. worst) thing about real estate ads is how they stretch the photos out and distort the crap out of them to make the place look wider and more spacious. I was renting a place years ago that was put up for sale. The ad photos looked NOTHING like the house I was living in. They had Photoshopped most of my furniture out but kept a few nice pieces. Windows that were tall and narrow looked wider than tall in all the photos. The stove and fridge looked twice as wide as they were, along with a “doubling” of the counterspace in the kitchen. The backyard looked like a football field. Every room looked twice as big as it was. An averaged sized townhome looked cavernous in the photos. It was comical.

        More recently, I went on MLS and discovered to my shock that my current home was for sale. Well, not quite. An identical unit a few houses down was for sale. But the realtor had substituted a picture of my house for the street view shot because I had nice flower planters and a nice maple tree in front. The pictures were taken a few months before the house actually went on sale, so by the time they went up on the website, it was November and my planters had been removed. That way no one would realize that the street view shot was actually of a different house.

  • Bluetheimpala 5 years ago

    Liquidity. Tock. BD4L.

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