Canada’s money supply is slowing at a pace that typically precedes a recession

Canada’s money supply is slowing as households pay down debt amid higher rates. Data from the Bank of Canada (BoC) shows that M1+, a narrow measure of money supply, slowed in June. The deceleration in annual growth usually precedes an economic contraction in the not so distant future. Short-term metrics show the slowdown is the steepest in 30 years, strongly implying a recession.

Narrow currency M1+

Canada’s M1+ is a narrow measure of the country’s money supply. It includes currencies outside banks, check deposits at chartered banks, trusts and mortgage companies, and credit unions. It measures the most liquid money supply, ie everything that can be spent in the short term.

M1+ is a narrow monetary measure, as opposed to M2+ which are broad measures that are more frequently discussed. BoC research indicates that M1+ provides insight into future productivity, with growth preceding booms and deceleration preceding recessions. M2+ includes more money flows, including growth in non-performing credit. It is therefore less useful for predicting economic growth. However, it is useful when trying to see where inflation is heading, according to the Bank of Canada.

Canada’s Tight Money Supply Is Slowing Fast

M1+ decelerates very quickly as interest rates rise. Annual growth stood at 5.09% in June, down from a record high of 30.5% in February 2021. This is the lowest rate since June 2019, when it indicated that a downturn was brewing before the pandemic hit.

Canadian Money Supply M1+

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

Source: Bank of Canada; Live better.

Growth falls at fastest pace since 1988

To underscore how steep this drop has been, analysts like to look at annualized growth. It’s just taking a shorter period and projecting it to show what an entire year would look like at that rate. By doing so, you can compare short-term growth to medium-term growth, indicating where it is heading. Every year-on-year growth move has to be preceded by a first quarter, and that’s where we would see it.

Today, we use the annualized growth rate over 3 months, the one favored by the BoC. It shows a decline of 7.34% in June, compared to a peak of 45% in April 2020. The 3-month growth has not been this negative since 1988. As mentioned before, deep contractions generally predict a recession. After all, no money means no growth, unless it’s unproductive and credit driven. Which, for the most part, only increases inflation.

At this point, few would be surprised to learn that an economic downturn is imminent. It’s actually hard to find an expert who doesn’t see a recession in the near future. This is yet another indicator boosting its likelihood in the coming months. However, experts called only a slight recession. There is no precedent for showing a mild recession occurring with such a sharp contraction in M1+…but maybe this time around is different.

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