Job market shows sign of softening, but economists say more needed to stop rate hikes

OTTAWA — Canada’s unemployment rate ticked up in May for the first time in nine months, but forecasters say the Bank of Canada will have to see more softening in the economy before it takes it takes a step back from raising interest rates. 

Statistics Canada reported Friday that a weaker summer hiring season for youth drove Canada’s unemployment rate to 5.2 per cent, up from 5.0 per cent. Overall employment was little changed last month as the economy lost a modest 17,000 jobs.

“Today’s negative print ends a streak of eight months of job gains,” said TD director of economics, James Orlando in a client note. 

“The question is now: Is this a one-off or the start of a trend? The labour market had been defying gravity for months and was bound for some giveback.”

The job report comes two days after the Bank of Canada raised its key interest rate by a quarter of a percentage point, bringing it to 4.75 per cent, the highest it’s been since 2001.

The decision to end its pause on rate hikes was prompted by a string of hot economic data, including a surprisingly resilient labour market. The central bank said the strength of the Canadian economy suggests getting inflation back to two per cent may be harder than it had previously expected.

Canada’s inflation rate was 4.4 per cent in April, down considerably from its peak of 8.1 per cent but still well above the central bank’s target. 

Economists reacting to Friday’s report say the Bank of Canada will need more than one relatively weaker job report to back off of rate hikes. In fact, many of them are expecting the central bank to move ahead with another rate hike in July. 

“If 425 basis points was not enough to slow things down, is another 25 basis points going to be the straw that breaks the camel’s back? That’s kind of hard to believe,” said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist. 

Earlier this year, the central bank paused its aggressive rate-hiking cycle that began in March 2022. The Bank of Canada was hoping its rapid monetary policy tightening  — which raised the cost of borrowing significantly for consumers and businesses — would be enough to stifle inflation. 

But the economy has proven to be more resilient this year than it had expected. Employers have continued to hire, consumers are spending more and the economy is growing. 

Wages also continue to rise rapidly, which the Bank of Canada says could stand in the way of restoring price stability. Average hourly wages were up 5.1 per cent in May compared to a year ago. 

Reitzes says the full effect of rate hikes have yet to filter through the economy, but even with that taken into account, the central bank is likely nervous that high inflation is pushing up inflation expectations among consumers and businesses. 

“If you don’t act more forcefully to bring down growth in a more timely manner, you run the risk of having inflation expectations stay higher,” Reitzes said. 

So far, the central bank has said very little about where it plans to take interest rates moving forward. During a news conference on Thursday, deputy governor Paul Beaudry said the central bank hasn’t made up its mind yet about July’s rate decision. 

“Every decision is taken one at a time at this point,” Beaudry said.

The Bank of Canada will have one more jobs report before its next interest rate decision, as well as updated readings on inflation and real gross domestic product. 

Although the job market hasn’t slowed enough for the central bank’s liking just yet, Statistics Canada noted in its report that job growth has moderated in recent months. It says monthly job gains between February and April averaged at 33,000. That follows the economy adding more than 300,000 jobs cumulatively between September and January.

In May, fewer people were working in business, building and other support services as well as professional, scientific and technical services last month. Meanwhile, employment rose in manufacturing, other services and utilities.

This report by The Canadian Press was first published June 9, 2023.

Nojoud Al Mallees, The Canadian Press