Canada

Canada’s Money Supply Points To An Economic Slowdown Around The Corner

One of Canada’s most important measures is showing choppy waters are ahead. Bank of Canada (BoC) numbers show the M1+, a measure of the money supply, continued to slow in October. The rate of growth is a leading indicator of economic growth, and is forecasting lean times ahead.

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.”

The BoC manages the growth rate of money indirectly, mostly by interest rate changes. When interest rates are increased, people borrow less, and pay more to service debt. The result is less “cash,” reflected in slowing growth of the M1+. When interest rates are decreased, people borrow more, and pay less to service debt. More cash on servicing means less cash to spend, and vice versa. The impact is first seen in industries that use large financing, like home and auto purchases.

Broad Measures Suck, Narrow Measures Rule?

Nah, bro. Totally different. The M1+ is one of the more narrow measures of money supply. More broad measures like M2+ include more streams of money creation, but give us different insights. The M1+ provides insights on the future level of productivity in the economy. That is, it tells us about things like the future of gross domestic product (GDP). The M2+ is more indicative of the future levels of inflation. High levels of economic productivity are not the same as a high level of inflation.

The Growth Rate of Canada’s M1+ Falls Over 46%

The growth rate of Canada’s M1+ is near one of the lowest levels of the year. The annual growth rate fell to 4.2% in October, just over 10.6% lower than the month before. Compared to the same month last year, the growth rate is 46.83% lower than last year. The monthly decline is seasonally expected, but it’s about twice as large as last year. The annual decline is an ominous signal.

Canadian M1+ 12 Month Percentage Change

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

Source: Bank of Canada, Better Dwelling.

Short-Term Spike?

Annualizing the pace of growth sometimes helps us get a gauge on where the number is heading. Analysts do this by taking a 3 month measurement of growth, and projecting it for the whole year. The resulting number is what the whole year would look like if every month was like the 3 most recent months. Before the trend can move higher, we need to see the a 3-month annualized trend rise above the 12 month trend. It needs to remain there for a few months, and be high enough to help the number change course.

The 3 month annualized trend is now higher than the annual growth rate. The rate came in at 5.5% in October, up 30.95% from the month before. The rate is also 25% higher than the same month last year. The good news is it is higher, but that’s where it ends. So far we’re looking at the first month higher, not giving it enough time to be certain of a reversal. The trend is also printing lower highs, and lower lows, indicative of a downtrend. The single month is creating a little noise, but we’re so far still on track to see this number trend lower.

Canadian M1+ 3 Month Percentage Change (Annualized)

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

Source: Bank of Canada, Better Dwelling.

The money supply is pointing to a slowdown for future economic productivity. The growth is near historic lows, and significantly below the median pace of growth. Usually when we see a drop this large, we see interest rate cuts to push it higher. Cutting rates here, with household debt levels this high, may not have the desired impact this time.

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12 Comments

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  • Tracy Kessler 1 week ago

    Poloz finally admitted what you’ve been seeing in the money supply was pointing to. Outlook looks grim. Nailed it, Daniel.

    https://business.financialpost.com/news/economy/bank-of-canada-holds-interest-rate-at-1-75-per-cent

  • Yussef 1 week ago

    Shouldn’t have cut in 2015, and we’d still be a unicorn economy on the extended business cycle.

  • Trader Jim 1 week ago

    Looks like the BOC normally cuts rates just before we see this number bottom.

    How long it took to bottom after peak cut .

    Nov 1990 – 6 months
    May 1995 – 2 months
    Dec 1998 – 3 months
    Oct 2003 – 4 months
    Jan 2015- 1 month

    Expect it to trend lower until they cut.

  • Trevor 1 week ago

    Yes, but a rate cut is good for home prices, no?

    • Ethan Wu 1 week ago

      Not necessarily. Rate cuts are typical of declining economic activity, which is a fundemental deterioration of economics.

      The one we received in 2015 was entirely due to a miscalculation of GDP. We thought it was a recession, but when the numbers were corrected, it came in as positive growth. Whoops!

      That was a boondoggle from the Bank of Canada, but we would never admit it since it shows both the BOC and StatsCan were incompetent. That’s not good for attracting foreign money.

      • zz 1 week ago

        I’ve been reading a lot of comments here

        basically

        high interest – bad for mortgage -> housing decline
        low interest – bad for economy -> housing decline
        inventory lowers – people are trying to hold out for the winter – hanging in there and house will decline
        inventory higher – housing decline…

        honestly… I think, maybe, just maybe… the only solution is to… make more money??? lol

      • Bertha 1 week ago

        I thought 2015 rate cut measures were a response to falling oil price, where WCS was in the 30s. Some oil sand companies failed, others posted huge losses followed by layoffs and production cuts. Then, of course, the housing declined quite rapidly.

        Was that not the case?

  • Joseph 1 week ago

    Canadian dollar dropped to 74 cents today.

    The crazy part IMO? I think exchanging it at 74 cents + commissions would still be worth the exchange once our buck drops below 69 cents.

    I understand Poloz mentioned 3 rate hikes before fiscal end, but that seems like insanity. I don’t think he’s got what it takes to do that, even though that’s what’s needed to save the Canadian dollar.

    This will be a turbulent upcoming year. When all is said and done, IMO, our dollar might be sitting at 59 cents by December 31, 2019.

    Joe

  • Bluetheimpala 1 week ago

    SCE, where are you my lad? No spin on the deteriorating M1+? No snarky comment about how this means nothing and BD is only a biased cesspool of bears hoping for a crash? Tick tock. BD4L.

    • J 1 week ago

      I’m not SCE but where is the crash in the City of Toronto though? By the time it crashes, house prices would have gone up so much since you starting predicting there is going to be a crash.

  • ken 1 week ago

    Pausing or ending hikes now will not prevent the housing crash, which is baked into the cake. Nothing short of a sudden and agressive reduction in rates has any chance to reverse the damage done. And that ain’t going to happen, so IMO, the BoC saying they might pause is little more than politicking, appeasing the R/E industry and interests.

    • SUMSKILLZ 1 week ago

      A pause means nothing if banks have changed their risk management practices. All I know for certain is that nothing is selling in my neighbourhood, Last sale I saw was just before Halloween. Scary stuff.

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