Canada’s Money Supply Is Decelerating At A Rate That Typically Precedes A Recession

Canada’s money supply is slowing down as households pay down debt amidst higher rates. Bank of Canada (BoC) data shows the M1+, a narrow measure of the money supply, decelerated in June. Annual growth decelerating typically precedes an economic contraction in the not-so-distant future. Short-term measures show the slowdown is the sharpest in the past 30 years, strongly implying a recession. 

M1+ Narrow Money

Canada’s M1+ is a narrow measure of the country’s money supply. It includes currency outside of the banks, chequable deposits at chartered banks, trusts and mortgage loan companies, and credit unions. It measures the most liquid money supply — basically anything that can be spent on short-notice. 

The M1+ is a narrow measure of money, as opposed to M2+ that are broad measures that are more frequently discussed. BoC research indicates the M1+ provides insights on future productivity, with growth preceding booms and deceleration preceding busts. The M2+ includes more money streams, including non-productive credit growth. It’s therefore less useful when forecasting economic growth. However, it is useful when trying to see where inflation is heading, according to the BoC. 

Canada’s Narrow Money Supply Is Slowing Down Quickly

The M1+ is decelerating very quickly as interest rates rise. Annual growth came in at 5.09% in June, down from the record peak of 30.5% in February 2021. It’s the lowest rate since June 2019, when it indicated a slowdown was coming before the pandemic hit.

Canadian M1+ Money Supply

The annual growth of Canada’s narrow money supply (M1+).

Source: Bank of Canada; Better Dwelling.

Growth Is Falling At The Fastest Rate Since 1988

To emphasize how sharp this decline has been, analysts like to look at annualized growth. This is just taking a shorter period and projecting it to show how a whole year would look at this pace. By doing this, you can benchmark short-term growth against medium-term growth, showing where it’s heading. Every move for annual growth needs to be preceded by a leading quarter, and this is where we would see it.

Today we’re using the 3-month annualized growth rate, the one preferred by the BoC. It shows a drop of 7.34% in June, down from a peak of 45% all the way back in April 2020. The 3-month growth hasn’t been this negative since 1988. As previously mentioned, deep contractions typically forecast a recession. After all, no cash means no growth, unless it’s non-productive and credit-driven. Which mostly just drives inflation higher.

At this point, few people would be surprised to hear an economic slowdown is coming soon. It’s actually difficult to find an expert that doesn’t see a recession in the near future. This is yet another indicator reinforcing it’s likely in the coming months. However, experts have only called a mild recession. There’s no precedence to show a mild recession ever happening with such a sharp contraction of the M1+… but maybe this time’s different.

4 Comments

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  • richard stanbridge 3 weeks ago

    this time is different. it was preceded by the flooding of cheap money by every central bank on the globe for longer than anything in banking and financial history. everything in the universe works in cycles to maintain some form of balance. the central banks set a course for over a decade that threw us off balance more than anybody has ever seen. the proof of that is the total debt that has been accumulated over the past two decades. this is going to get very very ugly.

  • Balter 3 weeks ago

    Reversion to the mean, Covid cash will make such numbers of limited value over the short to medium term. Of course it’s coming down, it’s just been kicked as high as Morneau and Trudeau could send it (ie double the debt of the past fifty years)

  • Dan 2 weeks ago

    lesson to be learned by the losers never be in debt when interest rates are low because one day they will go up and you will ve stuck in a debt cycle. haha basic economics and math.

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