Canada: Signs of Weakening Labour Market Suggest Soft Landing Talk Could Be Misplaced
- Canadian employment fell by 6k in July 2023, a second decline in three months that resulted in a third consecutive monthly rise in the unemployment rate. Table 1 summarizes key data points.
- It’s early, but our tracking now suggests real annualized GDP growth of about 1¼% in Q3 2023, slightly lower than the Bank of Canada’s latest projection. But the July jobs print is the first data point we’ve received for the third quarter, so that estimate is very much still subject to change.
July’s release contained many signs that the Canadian economy is slowing under the weight of sharply higher borrowing costs. Employment in construction—normally sensitive to interest rate changes—has now fallen in four out the past six months. This should give the Bank of Canada reassurance that its tightening continues to work as expected.
Less optimistic for inflation control efforts was the reacceleration of growth in permanent employees’ wages (graph). This indicator is tracked closely by the Bank of Canada to assess potential wage-push inflation.
Canada’s working-age population growth remained near record levels, and that has major implications for economic growth and monetary policy. Headcount gains put upward pressure on demand for goods and services. But they also increase the supply of labour, which should ease labour market tightness and could help contain potential wage-push inflation over time. That said, Statistics Canada’s release noted that the employment rate for recent immigrants—key contributors to the current population growth spurt—was down relative to July 2022.
Altogether, we think the weakening jobs print means that the Bank will keep rate hikes on hold at its September meeting. Economic activity appears to be moderating amid sharply higher borrowing costs, and we maintain that the full effects of prior increases have yet to be felt by Canadian consumers and businesses. However, the pickup in wage gains and continued boost from population growth suggest that the Bank of Canada will remain attuned to the risk that core persistent inflation stays sticky for a while. That said, with officials expressing the desire to avoid overtightening, we believe that the bar for further hikes is high in light of the recent signs of weakening in growth, employment, and inflation.
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