The Canadian economy unexpectedly shed jobs in July while the unemployment rate ticked higher for the third straight month, providing further evidence that the economy is losing momentum in the face of higher interest rates.
The country lost a total of 6,400 jobs and the unemployment rate rose to 5.5 per cent, up from 5.4 per cent in the previous month, Statistics Canada reported Friday. Bay Street analysts were expecting a gain of around 21,000 jobs in July, according to Reuters polling.
The slowdown in job creation should take some pressure off the Bank of Canada to raise interest rates again in September. At the same time, average hourly wages – which are closely watched by the central bank as a source of potential inflationary pressure – reaccelerated in July, rising at an annual rate of 5 per cent, compared with 4.2 per cent in June.
Job growth has been consistently strong through the first half of the year, despite the efforts of the Bank of Canada, which is raising interest rates and trying to weaken the labour market as part of its fight against inflation. This strength has started to wobble in recent months, with employment falling by 17,300 in May before rebounding by 60,000 in June. The unemployment rate has risen half a percentage point over the past three months, partly because job creation has failed to keep pace with population growth.
“These ebbs and flows in the headline employment readings tend to occur around turning points,” Royce Mendes, head of macro strategy at Desjardins Capital Markets, wrote in a note to clients.
“The simple fact that the economy has seen employment decline in two out of the past three months suggests that the Bank of Canada’s efforts to rebalance the labour market are working.”
The job market in the United States is also showing signs of cooling, according to new labour market data published Friday. American employers added 187,000 jobs last month. That’s in line with revised employment numbers for June, but lower than forecasters were expecting and notably slower than the average monthly pace of job gains through the first half of the year.
Both the Bank of Canada and the U.S. Federal Reserve are paying close attention to the labour market right now for signs that interest rates are high enough to bring the rate of inflation back to their 2-per-cent targets. Low unemployment and rapid wage growth is good for workers. But those things are not what central bankers want to see as they try to curb spending throughout the economy.
“There is mounting evidence that the extreme tightness of the Canadian job market is easing and, if inflation cooperates, suggests that the case for the Bank of Canada moving to the sidelines is now very strong,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients.
“That said, firm and persistent wage growth, which is working with a lag, suggests the Bank will still lean on the economy with these high rates for a prolonged period.”
In Canada, the construction industry had the largest number of job losses last month, shedding 45,000 positions. There were also sizable declines in the public administration, culture and recreation, and transportation and warehousing sectors. Over all, losses were concentrated in part-time work.
This was partly offset by gains in education, and health care and social assistance. There were also notable gains in agriculture, and in finance, insurance, real estate, rental and leasing, which Statistics Canada groups into a single category.
Regionally, employment was up in Alberta, New Brunswick and Prince Edward Island, and down in Manitoba and Saskatchewan. There was little change in other provinces.
The downshift in the labour market is happening even as the Canadian population grows at a record pace because of high levels of immigration. The latest Statistics Canada data suggest the slowing economy is not absorbing these new workers as quickly as before.
The employment rate for core-aged recent immigrants fell to 77.7 per cent in July, compared with 80 per cent a year ago. In comparison, the employment rate for people born in Canada was 86.6 per cent, little changed from a year earlier.
“Slight monthly declines aren’t rare in the [Labour Force Survey], but they do stand out when the population is growing so quickly,” Brendon Bernard, senior economist with the job listing company Indeed.com, said in an e-mail.
“The drop-off in job opportunities is now starting to show up in the unemployment rate, likely impacting new entrants to the labour force, including recent immigrants, more than others. So far though, the weakness hasn’t been accompanied by a substantial rise in layoffs. As a result, the downshift in overall momentum has been relatively gradual,” Mr. Bernard said.
While economists remain divided over whether the Bank of Canada will raise rates again at its next meeting, on Sept. 6, investors are betting that the bank will stand pat. Interest-rate swaps, which capture market expectations about monetary policy, are pricing in a 73-per-cent chance the bank will hold its benchmark rate at 5 per cent next month, according to Refinitiv data.
There will be several key data releases before the rate decision, including the Consumer Price Index numbers for July. The annual rate of CPI inflation fell to 2.8 per cent in June, but many economists expect it to tick back above 3 per cent over the summer.