The Canadian labour market is finally cooling off, at least a bit, raising questions of whether the Bank of Canada acted too hastily in raising interest rates this week.
In its Labour Force Survey released Friday morning, Statistics Canada said 17,000 jobs were lost in May, the first time in nine months there was a net job loss. The unemployment rate rose for the first time since last August, to 5.2 per cent.
The drop was driven largely by a fall in youth employment, as 77,000 people between the ages of 15 and 24 lost their jobs.
A consensus of economists surveyed by Bloomberg had forecast the economy added 20,000 jobs.
The lacklustre jobs report raised questions over whether the Bank of Canada may have acted too quickly in raising interest rates Wednesday, some economists suggested.
“Personally, I think the bank could have held off and taken a longer wait and see,” said Pedro Antunes, chief economist at the Conference Board of Canada.
The Bank of Canada cited continuing strength in the labour market in announcing its decision to raise its key overnight lending rate by 25 basis points — a quarter of a percentage point — to 4.75 per cent.
Last March, the bank began an aggressive rate-hike campaign in a bid to drive inflation down, pushing its key overnight rate from 0.25 per cent.
The theory is that by making it more expensive to borrow money, consumers — and businesses — will spend less, driving prices down and slowing the economy.
In January, a hike of 25 basis points came with a statement from bank governor Tiff Macklem that it was pausing hikes — at least temporarily. But a steady stream of stronger-than-expected economic data — including several straight months of strong job growth — put an increase back on the table.
Now, the pause is likely back, argued Antunes.
“I think they may go back to that ‘wait and see’ stance and see how much damage they’ve done already,” said Antunes.
Still, Antunes added a note of caution: one month’s report should be taken with a grain of salt.
“We need to be careful about one month. The trend is still pretty solid. We’ve got lots of job growth to start the year, and this essentially shows we’re hanging on to most of it,” said Antunes.
Stephen Tapp, chief economist at the Canadian Chamber of Commerce, argued it’s clear the job market’s breakneck pace is finally slowing.
“We shouldn’t overreact to one month of data, but it’s now clear that momentum in Canada’s labour market has faded since January’s blockbuster hiring binge. Will today’s release mark a turning point, when the strong-and-long run for Canada’s labour market finally came to an end?” Tapp said in an email.
A tight labour market and strong job growth, according to conventional economic theory, leads to higher wages, something the Bank of Canada has argued is contributing to inflation.
In May, average hourly wages were 5.1 per cent higher than they were a year ago, Statistics Canada said Friday. That’s a slight drop from the 5.2 per cent year-over-year growth seen in April.
That, said economist David Macdonald, shows that the Bank of Canada’s fears of wage increases driving inflation are wrong.
“It’s clear that wage gains are decreasing. They’ve been going down for four months now. There’s no evidence that wages are somehow out of control,” said Macdonald, senior economist at the Canadian Centre for Policy Alternatives. “If the Bank of Canada had seen numbers like this earlier, we probably wouldn’t have had a rate hike this week.”
Still, suggested BMO economist Benjamin Reitzes, the May jobs report wasn’t bad across the board, meaning another rate hike later this year could still be in the cards. He pointed to wage growth that’s still higher than the 4.4 per cent rate of inflation, as well as higher hours worked. And the Bank will have more data to work with by the time of its next rate announcement July 14.
“We’ll still get another jobs report before the July meeting, so the BoC will likely take this mixed report in stride and wait for more data,” Reitzes wrote in a report after the jobs data was released.
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