“Explosive” job growth raises the likelihood of another rate hike
Job growth is usually celebrated as a sign of a strong economy, but it’s not the kind of thing the Bank of Canada wants to see as it struggles to bring down inflation.
On Friday, Statistics Canada reported that 104,000 jobs were created in December, far more than the 5,000 forecast. Of that, 85,000 were full-time positions, marking the third consecutive month of growth.
As a result of the strong performance, the unemployment rate fell to 5% from 5.1%.
The bulk of the employment gains were seen in Ontario (+42k), Alberta (+25k) and British Columbia (+17k). StatCan also reported a rise in the number of self-employed workers (+11k), which was up for the third straight month.
For the full year, Canada’s economy added 394,000 new jobs. This is the fastest rate of growth since the economy added 497,000 jobs in 1976, due in large part to record immigration numbers, National Bank economists noted.
There are now 627,000 more jobs in Canada compared to before the pandemic, noted Scotiabank economist Derek Holt, who called the December job growth “explosive.”
What it means for the Bank of Canada’s next rate decision
Analysts say the strong jobs figures raise the odds of an additional rate hike by the Bank of Canada at its upcoming rate decision on January 25.
The jobs report “reinforced expectations that the Bank of Canada will continue hiking its policy rate,” wrote TD Bank economist James Orlando. “Though the BoC has signalled it could go either way with its next policy decision, the continued strength in employment means that the Bank isn’t done yet.”
Despite signs of slowing growth in other economic indicators, Marc Desormeaux, principal economist at Desjardins, said the employment figures “tilt the odds in favour of one final 25-bps rate hike from the Bank of Canada later this month.”
Reasons for the Bank of Canada to remain cautious
Despite the consensus for another 25-bps hike in a little over two weeks, some observers argue the Bank should then pause to fully assess the economic impacts of its rate hikes to date given the lagged effects of monetary policy.
It generally takes at least a full year for the full effects of rate hikes to work their way through the economy.
“Models based on historical sensitivities suggest that much of the impact of 2022 rate hikes in Canada and abroad will only reveal itself over the course of 2023,” CIBC’s Avery Shenfeld wrote recently.
He pointed to several specific examples in the economy to illustrate that lag effect:
While higher mortgage rates have stalled housing demand, the lag between the sales of new units and their completion means “the construction sector bite will come later.”
Higher mortgage rates have already started to impact those with adjustable-rate products, however those with fixed-rate products won’t feel the pain of higher rates until their mortgages renew.
A slowdown in manufacturing in the U.S., in addition to higher costs for capital, will also take time to spill over to Canadian business spending plans.
“Overshooting, and causing a deeper economic contraction than needed to get inflation back to earth, is a serious risk given the lags in monetary policy impacts,” Shenfeld warned.
He pointed to the most recent example from the early 1990s, when policymakers “tightened the policy screws” to tackle high inflation, but ended up with a “bigger downturn than they were bargaining for.”
“The benefits of waiting and seeing how much bite previous rate hikes have built in, before taking things too far, are in avoiding that sort of nasty surprise this time,” Shenfeld added.
“Once a sharp downturn is fully visible in the data, it’s often too late for a course correction, particularly since mild downturns and steep recessions can initially look quite similar until all the numbers, and all the revisions to them, are in,” he said.
And despite December’s strong jobs report, National Bank economists still believe the labour market will moderate in the coming months.
The data “does not change our view that the Bank of Canada should be cautious about considering further rate hikes after the very aggressive tightening orchestrated in 2022,” economists Matthiew Arseneau and Alexandra Ducharme wrote. “With extremely tight monetary policy and consumers simultaneously suffering from a loss of purchasing power, an interest payment shock and an unprecedented negative wealth effect, we continue to expect the economy to be near stagnant in the first half of 2023.”
They added that consumers have historically been “clairvoyant in perceiving reversals in the labour market.”
They point to the most recent data from the Conference Board, which showed consumer confidence in the labour market fading. The indicator returned to its 2019 level after reaching historic highs in 2021.
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