More than two years into the pandemic, Canadians’ wallets are still stuffed with cash.
There is currently about $113-billion worth of physical money in circulation in Canada, up by nearly 25 per cent from pre-pandemic levels. As a share of the overall economy, that’s more cash floating around than at any time since the early 1960s.
Cash in circulation in Canada
as a share of nominal GDP
5%
4
3
2
1972
1982
1992
2002
2012
2022
SOURCE: BMO CAPITAL MARKETS
Cash in circulation in Canada
as a share of nominal GDP
5%
4
3
2
1972
1982
1992
2002
2012
2022
SOURCE: BMO CAPITAL MARKETS
Cash in circulation in Canada as a share of nominal GDP
5%
4
3
2
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
2017
2022
SOURCE: BMO CAPITAL MARKETS
So much for the cashless society.
Most of the recent buildup of cash occurred in the early stages of the pandemic, when disastrous outcomes of all sorts suddenly seemed much more realistic than they previously had.
But cash holdings are still well above trend, after being relatively stable for the quarter-century prior to the pandemic.
Two years ago, there was little harm in stashing a bunch of cash for peace of mind. With interest rates near zero, it wasn’t as though a person could earn anything respectable in a savings account or fixed income investment. And with inflation nearly non-existent, there wasn’t much erosion to cash holdings from rising prices.
Big changes are afoot on both fronts. Inflation in Canada has averaged about 6 per cent in the first three months of 2022, while the yield on five-year Government of Canada bonds is higher than 2.8 per cent for the first time since 2011.
“People are now realizing they’re making a negative 6 per cent return on their cash,” said Kurt Rosentreter, a portfolio manager at Manulife Securities.
“Everyone’s revisiting cash balances, but I’m not sure they know what to do with it yet.” That will probably depend on why they held cash in the first place.
In the spring of 2020, with most of the country in lockdown and many grocery-store shelves stripped bare, many Canadians likely thought they needed to have some cash on hand just in case, said Doug Porter, chief economist at Bank of Montreal.
“I think a lot of people were thinking of worst-case scenarios and how they might protect themselves, which I don’t think is irrational at all,” Mr. Porter said.
As the pandemic dragged on, household finances at the national level actually improved, in part thanks to government income support. Consumers found themselves flush with cash, with nowhere to spend it.
Travel wasn’t an option. And bars and restaurants were shut down on and off through subsequent waves of COVID-19 infections.
Many businesses stopped accepting cash altogether, with contactless payment seen as a safer option. Cash transactions in Canada fell by 16.5 per cent in 2020 from the previous year, according to Payments Canada.
Many found a use for their excess cash in home-improvement projects. “Let’s be honest, that’s certainly a sector that has long been associated with quite a bit of underground activity,” Mr. Porter said.
With the renovation boom showing signs of slowing down, some Canadians are now looking at other ways to deploy their cash reserves.
Fast-rising interest rates have emphasized the risk of elevated household debt, leading many to turn to debt-reduction plans. “I’m seeing more doubling of payments and more lump-sum paydowns on mortgages,” Mr. Rosentreter said.
The flip side of higher borrowing rates is better returns for savers. The going rate on five-year guaranteed investment certificates is approaching 4 per cent for the first time in more than a decade.
“It’s about time,” Mr. Rosentreter said. “I’m almost seeing the stress levels go down with my retirees.”
The current trends provide powerful incentives for putting cash to use, and could bring an end to elevated growth rates of cash holdings, Mr. Porter said.
“I would not be surprised to see that number come down a lot in the next year, as presumably and hopefully we put the pandemic behind us,” he said. “People will realize they don’t really need to hold on to that much cash and there is an opportunity cost to holding that cash.”
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