April 12, 2024

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Canada’s jobs market shows signs of ‘fraying’. What it means for the Bank of Canada – National

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Canada’s jobs market shows signs of ‘fraying’. What it means for the Bank of Canada – National

Canada’s unemployment rate rose in June despite a substantial rebound in job gains, Statistics Canada said Friday, which economists say sends “mixed” signals to the Bank of Canada ahead of a hotly anticipated interest rate decision next week.

The agency said Friday Canada added 60,000 jobs amid a gain of 110,000 new full-time positions last month. That marked the largest increase in employment since January.

Dawn Desjardins, chief economist at Deloitte Canada, says the growth in jobs was about three times the consensus estimate from economists heading into Friday’s Labour Force Survey release.

But the unemployment rate rose to 5.4 per cent, up from 5.2 per cent in May, as the size of Canada’s overall labour pool grew. Canada has seen surging population growth in recent months, including hitting the 40-million-population mark in June.

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Click to play video: 'Canada’s population just hit the 40-million milestone'


Canada’s population just hit the 40-million milestone


Desjardins says the high immigration rates in Canada so far this year are offsetting job gains, driving up the overall unemployment rate.

So (there were) strong job gains, just not enough to absorb all the new entrants into the labuor market,” she tells Global News.

Canada’s unemployment rate now stands at its highest level since February 2022.

A separate jobs data release south of the border on Friday showed the unemployment rate in the United States ticked down to 3.6 per cent in June from 3.7 per cent the previous month. America’s employers pulled back on hiring but still delivered another month of solid gains last month, adding 209,000 jobs in a sign that the economy’s resilience is confounding the Federal Reserve’s drive to slow growth and inflation.

Signs of ‘fraying’ in the labour market

TD Bank senior economist Leslie Preston said in a note Friday that despite strength in the June headline jobs number, the three-month and six-month trends in employment show hiring is indeed slowing down, in keeping with expectations that Canada’s unemployment rate will hit 6.0 per cent by the end of the year.

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Desjardins, too, says that there are signs of “fraying” in Canada’s tight labour market beyond June’s rise in employment.

The numbers of vacant positions are trending down from historic highs in recent months, Desjardins says, which suggests the pressure built up in Canada’s labour market is easing as businesses find the staff they need.

Meanwhile, year-over-year wage growth slowed significantly last month, falling to 4.2 per cent compared with 5.1 per cent in May. Wage growth had been above the five per cent mark for much of 2023.

RSM Canada economist Tuan Nguyen says that’s good news for the Bank of Canada, which has sought to cool inflation and dampen demand in the economy by raising its benchmark interest rate.


Click to play video: 'Inflation rate dropped to 3.4% in May, lowest in over 2 years: Statistics Canada'


Inflation rate dropped to 3.4% in May, lowest in over 2 years: Statistics Canada


 

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Higher levels of immigration — and a larger labour pool by extension — can help to cool inflation pressures, he tells Global News.

Nguyen says that having more workers in Canada can reduce the pressure on wages as businesses are forced to compete less for talent. Wages are a “very important component” of inflation, he notes, and are a key metric watched by the Bank of Canada.

Deloitte’s forecasts for the unemployment in Canada are less severe than TD’s, calling for the rate to rise to 5.6 per cent by year’s end as part of a “mild recession” in the second half of 2023.

But Desjardins says that should be enough to take the “froth” off the labour market and cool wage growth.

“All of this feeds into the idea that we will see inflation moving back towards the Bank of Canada’s two per cent target over the next several months,” she says.

‘Mixed’ jobs report for Bank of Canada, economists say

The June jobs report is the last major economic data release before the Bank of Canada announces its interest rate decision on Wednesday.

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Nguyen says that, after Friday’s jobs report, July 12 will be a “live meeting” with markets pricing in 60 per cent odds of a 25-basis-point increase in the policy rate.

After Friday’s jobs report, all six big Canadian banks said they now expect a rate hike on Wednesday.

CIBC was previously a hold out about a July rate increase, expecting the Bank of Canada would wait until September to hike again.

Senior economist Andrew Grantham said in a note that June’s strong jobs print more than erased the losses recorded in May. Taken together, he says there likely hasn’t been enough easing in the jobs market for the Bank of Canada’s liking.


Click to play video: 'How the Bank of Canada’s latest interest rate hike could impact you'


How the Bank of Canada’s latest interest rate hike could impact you


The rebound in jobs during June, and an unemployment rate that is still low relative to pre-pandemic norms, may have just tipped the scales towards an immediate hike,” he wrote.

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Nguyen isn’t convinced the Bank of Canada needs to raise its rate again in July. A “soft landing” — the scenario in which the economy slows enough to tame inflation but skirts a technical recession — is still in the cards following the strong June jobs report, he argues, and the central bank ought to let those possibilities play out before delivering a final hike that might not be necessary.

“I think there are a lot more reasons to take a break in July and then reassess in September, because by then we’re going to have more data on jobs, inflation and spending,” he says.

Nathan Janzen, RBC’s assistant chief economist, said in a note that he felt the jobs report was “mixed.”

He said the Bank of Canada likely didn’t come off the sidelines from its rate tightening cycle for just one move when it surprised markets and economist with a 25-basis-point hike last month. Signs of resilience in Canada’s economy beyond the labour market will likely keep the central bank in rate-hike mode on Wednesday, Janzen argued.

“Economic growth data and ‘sticky’ core inflation readings since then haven’t been soft enough to derail those plans,” he wrote.

Desjardins says metrics like declining job vacancies are indications that the Bank of Canada’s rate hikes to date are starting to take hold in the economy, if slowly.

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“Is it enough for the bank to say, ‘OK, our work here is done? ‘ I don’t think so. I think they will be raising the policy rate next week.”

— with files from Global News’ Anne Gaviola, The Canadian Press and The Associated Press


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