Canadians Hang Onto More Cash, But We’re Still Looking At A Credit Slowdown

Canadians held onto more cash, but a credit slowdown is still brewing. Bank of Canada (BoC) numbers show the M1+ saw mild acceleration in August. Don’t let the mild acceleration of broad money growth fool you, it’s actually still pretty bad. The pace of growth is almost half of where it was last year, and is still one of the lowest prints on record.

What’s The M1+?

The M1+ is the country’s measurement of the most liquid form of currency. It measures currency outside of banks, plus chequable deposits held at chartered banks, trust and mortgage loan companies, and credit unions. In other words, it’s what you can spend or your credit card company will transfer with little notice. It’s one of the most important measures of the economy, especially if you’re a monetary policy geek – and who isn’t?

Since the BoC manages money growth “indirectly,” they want to know how this number is moving. When interest rates rise, people need more cash to service their debt, which means less cash on hand. Less cash on hand means the M1+ growth rate drops. Slowing growth of this number is almost always one of the first signs of slowing economic growth. The impact is usually first observed in large purchases, like that of homes and cars. If you’re a business that depends on credit, it would be prudent to start squirreling away some extra risk capital.

Canada’s M1+ Growth Is Over 52% Lower Than Last Year

There’s good news and bad news with the growth rate. The annual pace of growth hit 4.4%  in August, a slight improvement from the month before. The improvement is specious however, since the rate of growth is still 52.68% lower than last year. Yay on the monthly improvement, but that abysmal annual growth still overshadows it.

12 Month Change of Canadian M1+

The annual percent change in M1+, one of Canada’s broad measures of money.

Source: Bank of Canada, Better Dwelling.

The acceleration might provide more confidence for a rate hike, but it’s far from good news. The annual pace of growth is still some of the lowest we’ve seen on record. Prior to the past 5 months, we haven’t seen numbers this low since 2003. One important difference between 2003 and now, we were cutting interest rates in 2003. Today, we’re looking to raise them, which would force the M1+ growth rate even lower.

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  • Investor 5 years ago

    I’ve taken advantage of MBNA’s 0% Balance Transfer credit card for many years. But sometimes this year, they made changes to what used to be a default 1% fee on 0% transfer for 12 months and increased it substantially. If that’s not credit tightening, I don’t know what else is. Money is no longer cheap!

    • Cam 5 years ago

      How much did it jump? A lot of prime products are jumping, but I haven’t seen credit cards get much higher.

  • Marcus 5 years ago

    Since the BOC can only see one month at a time, they’ll probably raise interest rates and drop the M1 back to early 1990s levels.

  • Charlie Robson 5 years ago

    In before a Realtor or someone with their whole net-worth in a 500 sq ft condo facing railroad tracks says that slowing economic growth and higher interest rates are bullish for home prices.

    • CS 5 years ago

      Oh ha ha ha ha ha!!

      I had to read that post a few times before I got it!!

  • JJ 5 years ago

    The economy has never been doing better. Past movements are not indicative of future ones. You’re reading too much from a very small indicator no one’s ever heard of.

  • Jack Chen 5 years ago

    If interest rates hike tomorrow, we’re looking at losing another 3% of buying power on homes. Variable rate borrowers are looking at another 3% rise in costs. I expect the latter to show up in the M1+ very soon afterwards.

  • Brian Ripley 5 years ago

    My chart of Canadian Household Debt, GDP, Foreign Direct Investment and Balance of Trade
    …clearly shows that

    1) The widening spread between total household debt and household mortgages means we are borrowing even more to maintain lifestyle.

    2) Foreign Direct Investment OUT higher than IN over the last 20 years means Canadian companies are investing outside of Canada to get a better return on Capital and Labour. For every $1 of investment coming in to Canada, $1.36 leaves (full year 2017 data)

    3) Since the 4Q 2008 crash into the Pit of Gloom, the Balance of Trade has been annually negative for 64% of the time which means that OUR debt obligations continue to provide more stimulus to offshore than onshore producers.

    As credit tightens, weak hands will be forced to raise cash from sales or income to maintain lifestyle. If the sales and income won’t suffice, consumption will slow and the business cycle will head for the trough.

    • John 5 years ago

      Interesting share, thank you!

      Can I criticize that 2008/2009 is already branded as The Great Recession, so trying to rebrand it will only serve to confuse less sophisticated readers.

  • CBo 5 years ago

    Any way to tell if the recent draw down on equities is reflective of investors liquidating portfolios, TFSA accounts or making early RRSP withdrawls to stay afloat? As most banks have recently raised lending rates before the BOC does tomorrow, is there any way of telling if the draw down on markets is being used to service debt obligations?
    I noticed my Canadian bank holdings are taking a beating, BNS down over 10% from when I last purchased this past summer. I’m assuming mostly Canadians own Canadian banks stocks and maybe the two are related. Can anyone tie this together?

    • Beh G. 5 years ago

      I don´t follow the stock market too much but Canadian banks dropping may have something to do with what´s going on in with Australian banks. Remember, they were supposed to be the beacons of stability and good practices just like Canadian banks… that was of course until poopoo hit the fan late last year on a grand scale with a lot of practices similar to those in the US pre-2008 coming to light.

      Of course, there´s a bit of deleveraging going on in all asset classes at the moment and if investors are finally coming to terms with the risks in Canadian RE, the banks have a lot of exposure in the sector and a bit of hysteria would make sense. Again, I´m no expert but bank stocks have also been great for their dividends so with interest rates going up those dividends may not look as attractive.

  • Investor 5 years ago

    Hard to tell. But there’s likely some sort of connection with the stock market, considering they all move in tandem. Credit is tightening or drying up and folks are turning to whatever they can turn to for now. I don’t think it’s panic time yet, though it does look like we haven’t yet seen the worst.

    • Cbo 5 years ago

      Also of note, I checked my available credit line rates: HELOC at 4.6% and unsecured at 8.2%, both going up tomorrow and likely higher next year. The age of free money is so 2010. These lines are no longer viable options to float further investments or make new acquisitions on a whim.
      I know a lot of people carrying huge credit line balances or plan on making $30-$50K renos just cause, and likely have no idea what rate they are paying to service these obligations.

      • Investor 5 years ago

        If I may use Bluetheimpala’s popular phrase: “Tick-Tock” .

  • Johnny Boy 5 years ago

    Its going to end very bad….I kind of feel sorry but people, but considering how smug Canadians were when things went south in the US, I will sit back and watch with popcorn as the carnage happens.

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