Canada’s labour market is softening as the unemployment rate rises for a third consecutive month, offering some evidence the economy is finally slowing down.
Statistics Canada reported Friday employment was little changed in July, falling by 6,400 jobs. Meanwhile, the unemployment rate ticked up to 5.5 per cent as the economy struggles to create enough jobs to match the pace of population growth.
The federal agency says job losses last month were led by the construction industry, while the greatest job gains were made in health care and social assistance.
May served as a turning point in the labour market: the unemployment rate rose for the first time in nine months. Prior to that, the unemployment rate was hovering at five per cent, just above the all-time low of 4.9 per cent reached last summer.
As Canada’s population continues to grow rapidly, rising unemployment signals the economy isn’t creating enough jobs to absorb a larger workforce.
“We’ve seen a consistent increase in the number of people without a job in Canada, but people that are still in the labour force,” said James Orlando, TD’s director of economics.
Job vacancies have also declined in the country, offering another sign that the labour market is loosening.
Orlando says high population growth is helping the economy stay afloat as newcomers add to demand. So instead of high interest rates leading to outright job losses, Orlando says the unemployment rate is rising.
“When people come to Canada, even if they don’t get a job right away, they’re consumers, right? They’re looking for housing, they need to buy food, they need to buy clothes. And so they’re buying stuff within the economy. And that is a demand shock,” Orlando said.
“It’s putting a floor under the economy at a time when most people would have thought it would be contracting.”
The Canadian economy has outperformed expectations this year, pushing the Bank of Canada to raise interest rates again in both June and July.
By raising the cost of borrowing for consumers and businesses, the central bank is hoping the economy will slow enough to bring inflation back to its two per cent target.
With the central bank’s key interest rate now sitting at five per cent — the highest it’s been since 2001 — all eyes are on what it chooses to do in September.
Orlando says the economic outlooks suggests the Bank of Canada doesn’t need to raise interest rates again next month.
TD’s updated forecasts suggest the economy will continue to slow, pushing up the unemployment rate to 6.5 per cent in the fourth quarter of 2024.
“Every single day that goes by, more and more people are going to be impacted by the rising cost of housing, specifically on rising mortgage rates, and so it’s going to force a lot of people to adjust their spending habits,” Orlando said.
BMO’s chief economist, Douglas Porter also agrees that the chances of a rate hike in September are falling.
“The soft July employment report is just the latest arrow in the quiver of signs that the economy is losing momentum. Along with the recent friendly CPI result, we believe that the case for the Bank of Canada moving to the sidelines is now very strong,” Porter wrote in a client note.
But with underlying price pressures and wage growth still high, Porter said rates may have to stay high for long.
Inflation in June fell to 2.8 per cent, within the Bank of Canada’s target range of one to three per cent. But core measures of inflation which strip out volatility show prices are still rising quickly and new forecasts from the central bank suggest it expects inflation to get back to two per cent by mid-2025.
The central bank has also raised concerns about the pace of wage growth, noting rapid wage gains would make it challenging to get inflation back to target.
But Orlando says wage growth is a “lagging indicator,” meaning workers are getting wage increases to reflect the rapid rise of inflation that already occurred. But falling job vacancies and rising unemployment suggest high wage growth won’t persist.
“These are the best indicators that you’re not going to get keep wages growing at this five per cent level going forward or into perpetuity, they’re going to ease based on the fact that the labour market is clearly loosening,” Orlando said.
