Canadians are coming off a credit growth high, and while expected, it may not be pretty. Bank of Canada (BoC) data shows the M2++ broad money supply printed the lowest annual growth on record in April. That’s good news for tempering inflation, but bad news for the general economy.
M2++ Money Supply
The M2++ is the BoC’s broad measure of the money supply, and includes most forms of “money.” That’s anything you can spend, such as cash and chequable deposits, as well as liquid assets (i.e. savings bonds, non-money market mutual funds, etc.). The central bank is trying to capture the growth of money, or anything “near money.”
The BoC argues the M2++ has a close relationship with inflation, leading by 1 to 2 years. A rapid expansion of the M2++ is found to precede increased inflation, while a slowdown indicates deceleration may be on the horizon. The former typically precedes good times, when people are most comfortable borrowing. The latter not-so-great times, since slowing inflation is due to a lack of demand.
Canada’s Money Supply Is Growing At An Unusually Slow Rate
Canada’s broad money supply grew at an unusually slow rate. Annual growth fell to just 2.1% in April 2023, down from the 8% rate seen a year before. It’s about a quarter of the median growth rate seen over the past 60 years, and the slowest growth on record.
The slowdown was expected to some extent, due to the huge growth that preceded it. Annual growth peaked at 14.3% in 2021, the highest rate since the early 80s—nearly two generations ago.
We know. There are so many numbers thrown around that it’s tricky to comprehend. Think of it this way, when growth peaked at 14.3%, it means 1 in 7 dollars at the time didn’t exist a year before. That’s a very rapid rate of growth, which explains why Canada hasn’t seen it since the early 80s inflation crisis.
There are two big takeaways here—inflation and slow economic growth. The sharp slowdown of the M2++ almost certainly means credit demand is falling, and inflation will stabilize. At the same time, an economic slowdown is occurring while the population is printing some of the highest growth ever.
“The BoC argues the M2++ has a close relationship with inflation, leading by 1 to 2 years. A rapid expansion of the M2++ is found to precede increased inflation, while a slowdown indicates deceleration may be on the horizon. The former typically precedes good times, when people are most comfortable borrowing. The latter not-so-great times, since slowing inflation is due to a lack of demand.” – That right there is the most important, most usable paragraph I’ve read on here in my 7 years following this site.
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Great blog from Daniel Wong. The 12-month growth rate of broad money was also just 2.1% in March 2023, and was the record low growth rate then. (The series starts in January 1968.) The monthly rate of change for April 2023 was -0.2%, the first monthly decline in the whole history of the series, if one ignores the -0.01% change in August 2022, when the series was essentially flat. Maybe one shouldn’t ignore it, and take on the fact that there were two declines in the last nine months, the only two ever. Even given the big overhang of the existing stock of broad money, these broad money declines should surely be cause for concern.