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Monitor Canada's Slowing Money Supply, C.D. Howe Institute Warns

  • Deceleration of money growth may give pause to Bank of Canada
  • M3 aggregate up 1.8% from a year earlier, slowest since 2010

If money still matters, the Canadian economy could be in trouble.

Measures of Canada’s money supply have seen a sharp deceleration since the middle part of 2017. Year-over-year growth in one narrow metric of money, M1, slowed to 7.4 percent in November, the lowest since 2015. Growth in the broader M2++ monetary aggregate slipped to a more than five-year low of 6.1 percent in November, while the even broader M3 aggregate slowed to its lowest since 2010.

According to analysts at the C.D. Howe Institute, that could be a warning sign. While the Bank of Canada no longer monitors monetary aggregates closely, there still remains evidence that in the longer-term the money stock is correlated to spending and inflation even though it’s no longer a reliable indicator of the economy in the shorter term.

The slowdown could reflect rising interest rates for example, by increasing the costs of holding money, and not flagging any economic weakness, according to a note released Tuesday from from C.D. Howe’s Bill Robson and Jeremy Kronick. Yet, this explanation wouldn’t explain why broader measures, which include higher yield assets, are slowing more dramatically, they said.

Their conclusion: policy makers should keep a close eye on the data.

The slowdown “merits some attention,” the C.D. Howe report said. “It may reflect further changes in the financial industry and adjustments to interest rates, in which case it is nothing to worry about.”

“But if it signals that Canadians are holding –- that our financial system is creating -– less transactions money for other reasons, ” they said “it would prefigure a weaker economy in 2018, and undermine the case for further policy rate increases in the coming months.”

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