Cracks in job market grow as BoC succeeds at slowing economy to a near halt

The unemployment rate was 5.7 per cent in October.

After the labour market experienced a strong bounceback from the pandemic, the unemployment rate has been on an upward trend since April as the Canadian economy shows clearer signs of weakness.

Real gross domestic product — which measures the size of the economy — has been struggling to consistently grow over the last year. The most recent GDP report showed the economy shrank 1.1 per cent on an annualized basis in the third quarter.

“Partially echoing yesterday’s GDP report, Canada’s economy is hanging in, but the clear softening in the labour market is consistent with continued soft growth,” Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, wrote in a client note.

“While the headline (employment) increase was better than expected, the ongoing increase in the unemployment rate is the bigger story, and likely better reflects the state of the economy.”

Canada’s unemployment rate is now hovering around pre-pandemic levels but is expected to continue rising as higher borrowing rates weigh on businesses.

“The increase hasn’t been that large to date, but it is the kind of increase that typically you only see at the start of a labour market downturn,” said Nathan Janzen, RBC’s assistant chief economist.

Most forecasters have been convinced for a while that the Bank of Canada is finished raising interest rates — barring unexpected stubbornness in inflation. Now, many of them are trying to gauge whether the economy is weakening enough to justify rate cuts.

The central bank’s next interest rate announcement is set for Wednesday and comes after it opted to hold its key rate steady at five per cent during the last two decision meetings.

“They’ve probably done enough in terms of interest rate hikes and the next move, eventually, when it comes will be a cut rather than another increase,” Janzen said.

Many commercial banks, including RBC, expect Bank of Canada to start cutting interest rates next year. But Janzen says the central bank is in no rush to switch gears, given inflation is still above the two per cent target.

Canada’s inflation rate fell to 3.1 per cent in November.

The weaker job market also means more workers are finding themselves unemployed due to layoffs. Friday’s report says unemployed people last month were more likely to have been laid off compared with a year ago.

Despite those trends, however, average hourly wages continued to grow quickly — rising 4.8 per cent from a year ago — as workers seek compensation for the recent runup in inflation.

Janzen says the strong wage growth, while a potential risk to the Bank of Canada’s inflation-fighting efforts, largely reflects workers trying to recoup lost purchasing power.

“Wage growth for a long time was trailing well behind inflation. And so there’s an element of catch-up here, still, where wages are catching up to inflation, and not the other way around,” Janzen said.

“But under the surface it still looks like that demand-supply balance for labour is starting to move more in favour of businesses in wage negotiations, rather than workers.”

This report by The Canadian Press was first published Dec. 1, 2023.

Nojoud Al Mallees, The Canadian Press

by Canadian Press

Cracks in job market grow as BoC succeeds at slowing economy to a near halt

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