One of Canada’s broad measure of money showed a mild improvement. Bank of Canada (BoC) numbers show the M1+, the most liquid form of cash, saw a mild uptick in growth for June. The increase is a positive, and could mean Canadians are taking the interest rate hike well. Though a single month uptick is far from a break in trend, with short-term indicators still pointing to further deceleration.
What’s The M1+?
The M1+ is the BoC’s measure of the most liquid form of money. Currency outside of banks, chequable deposits at chartered banks, trust and mortgage loan companies and credit unions are included. To be blunt, it’s anything you can spend with little to no notice. It’s one of the most important indicators for the economy, but is largely ignored. Totes boring, but if you’re watching interest rates, it gives you a good sense of context.
The BoC manages the rate of money growth indirectly. They do this primarily by influencing short-term interest rates. When interest rates rise, people and businesses borrow less and pay down debt. The result is slowing growth of M1+, which usually accompanies slowing economic growth. That’s bad for rising rates, and employment – two fundamentals for real estate.
The central bank also considers the M1+ to be a leading indicator of inflation. When growth accelerates, inflation is generally on the way up. When growth decelerates, inflation soon follows. Interest rates are used to assist in the control of inflation, rising with inflation to taper growth, and getting cut when inflation drops. Those rates also happen to influence the rates used for mortgages, reducing and increasing servicing costs. It’s a serious real estate indicator, that’s seriously under used.
Canada’s M1+ Moves Higher In June
The Canadian M1+ showed some signs of life, moving slightly higher. The annual rate of growth for the M1+ increased to 4.2% in June, up from 4% the month before. Before you get too excited, the month before was the slowest pace of growth since 2003. That was the year Statistics Canada said Canadians ran down their savings, and borrowed to “finance their outlays.” Basically, they borrowed and relied on savings to make up the lack of wage increases. Beating last month was a low bar to clear.
12 Month Change of Canadian M1+
The annual percent change in M1+.
Source: Bank of Canada, Better Dwelling.
Short-term Trend Is Still Falling
The short-term pace of growth continued to go lower, indicating the annual rise may just be a blip. The 3-month annualized growth decreased to 2.7% in June, from 3.1% the month before. That means if the whole year was like the past 3 months, annual growth would fall to 2.7%, a level last seen in the 1990s. It’s unlikely to fall that low with what we’re seeing with the economy today, but the trend is still on target to move lower.
The growth is encouraging, but wasn’t enough to change the direction of the trend. Currently, all signs still point to the end of the business cycle, which the real estate cycle trails. A single month improvement is just a hiccup in the trend, not a change in direction. It’s still worth watching this number to see how it responds to the most recent interest rate hike though. The full impact of the last hike won’t be seen until December.
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