Canada’s labour market stumbled in March as the unemployment rate jumped above 6 per cent for the first time in more than two years, the latest sign of a weakening economy.
The country lost a net 2,200 jobs last month, Statistics Canada said Friday, undershooting analyst expectations of 25,000 positions added. The unemployment rate rose to 6.1 per cent from 5.8 per cent in February, and it has risen by a full percentage point over the past year.
The unemployment rate was driven higher in March by an increase of 60,000 people searching for work or on temporary layoff, Statscan said.
The Canadian numbers offered a stark contrast to the United States, which on Friday reported a gain of 303,000 jobs in March, a result that blew past estimates, while its unemployment rate fell a tick to 3.8 per cent. Because of the continuing strength in the U.S. economy, investors are dialling back their expectations that the Federal Reserve will start to lower interest rates in June, viewing it as roughly a 50-50 chance.
In contrast, traders are raising their bets that the Bank of Canada will start to cut rates in June, with July seen as a lock. The central bank will make its next monetary policy decision on Wednesday. While analysts don’t expect a change to the overnight lending rate, now at 5 per cent, they are looking for any clues that rate cuts will begin in June or July.
“The Canadian labour market is beginning to show more cracks,” Royce Mendes, head of macro strategy at Desjardins Securities, wrote in a client note. “Combined with the recent run of soft [Consumer Price Index] prints, these numbers should have the Bank of Canada opening the door next week to easing policy around the middle of this year.”
Of late, the country has struggled to create work for a historic influx of newcomers, with the population aged 15 and up rising by nearly 91,000 in March alone. As a result, the employment rate has fallen for six consecutive months to 61.4 per cent.
Self-employment fell by 29,000 in March, offsetting increases in the public and private sectors. Employment fell by 29,000 in accommodation and food services, the worst result of any industry, followed by a decline of 23,000 positions in wholesale and retail trade.
Total hours worked across the economy fell by 0.3 per cent in March, which doesn’t bode well for gross domestic product, which had started the year with strong gains.
Wage growth is proving sticky, a frequent concern for the Bank of Canada as it tries to wrestle inflation back to its 2-per-cent target. Average hourly wages rose 5.1 per cent over the past year, in line with growth of 5 per cent in February.
In a client note, Bank of Montreal chief economist Doug Porter said the combination of rising unemployment and elevated wage growth “leaves the Bank of Canada in a tricky spot, with the job market clearly softening, yet still spinning off strong income gains. On balance, the BoC will likely view the overall results as pointing to more disinflationary pressure ahead, and will await the next couple of inflation prints, but a June cut is looking a bit more likely now.”
At the March decision, Bank of Canada Governor Tiff Macklem said it was still too early to consider lowering the overnight lending rate. “Recent inflation data suggest monetary policy is working largely as expected,” he said at a news conference. “But future progress on inflation is expected to be gradual and uneven, and upside risks to inflation remain. Governing Council needs to see further and sustained easing in core inflation.”
The annual inflation rate is tracking lower than the Bank of Canada projected for the first quarter, and, in February, it ebbed to 2.8 per cent. (Inflation had peaked at roughly 8 per cent in mid-2022.) Combined with weakness in the labour market, this could prompt the Bank of Canada to use its April decision to set up a rate cut soon after, as central bankers often telegraph their moves in advance.
After Friday’s report, investors ramped up their bets for a first rate cut in June. Interest-rate swaps, which capture market expectations about monetary policy, were pricing in an 80-per-cent chance of a quarter-point cut in June as of Friday afternoon, up from 72 per cent on Thursday, according to Bloomberg data. Traders are expecting three rate cuts in 2024, which is fewer than earlier this year.
“While today’s jobs data isn’t dire enough for the BoC to renege on its forward guidance and cut rates next week, it is weak enough to confirm our view that June’s decision to cut will be the first of a sequence,” Simon Harvey, head of FX analysis at foreign-exchange company Monex Europe, said in a research note.
Matt Lundy