Written by 12:32 PM Bank of Canada, Economic news Views: 876

Will rising unemployment hasten the Bank of Canada’s coming rate cuts?

Canada’s labour market stumbled in June, with the unemployment rate rising to 6.4%, up from the previous month.

Canada unemployment rate rising

Canada’s labour market stumbled in June, with the unemployment rate rising more than expected to 6.4%.

Despite the disappointing report, economists largely think the Bank of Canada will continue to bide its time before delivering its next rate cut.

The economy saw a net loss of 1,400 jobs in June, according to figures released today by Statistics Canada. It consisted of a gain of 1,900 part-time positions but a loss of 3,400 full-time jobs. This fell well below economists’ expectations of a 25,000 position gain.

Who’s feeling the economic pain?

Job losses were concentrated in transportation and warehousing (-12,000; -1.1%) and public administration (-8,800; -0.7%), while significant gains were reported in accommodation and food services (+17,000; +1.5%).

“We are seeing job losses in areas like manufacturing, office work, and solid jobs, but massive increases in fast food, accommodation (hotels), etc.,” rate expert Ryan Sims observed. “We are trading in good paying positions for temporary, low-wage positions,” a trend he says has been going on for some time.

Canada’s national unemployment rate has risen 1.3 percentage points since April of last year, equating to 1.4 million unemployed individuals in June, an increase of 42,000 from May.

StatCan’s data also reveal that only 21.4% of those unemployed in May transitioned to employment, a lower rate than the pre-pandemic average of 26.7%. Additionally, the proportion of long-term unemployed (more than 27 weeks) rose by 4 percentage points to 17.6%.

“A lower proportion of unemployed people transitioning into employment may indicate that people are facing greater difficulties finding work in the current labour market,” StatCan observed.

The most affected groups include youth aged 15 to 24, with their unemployment rate rising 0.9 percentage points to 13.5%, and new immigrants, whose unemployment rate increased to 12.7%.

Economists from National Bank highlighted the imbalance between job creation and recent strong population growth.

“Job creation hasn’t kept pace with the population’s meteoric rise for some time now,” economists Matthieu Arseneau and Alexandra Ducharme wrote in a note. “A stagnation in employment as observed in June, while the population is up by 100K, is a recessionary deviation.”

Regionally, Quebec experienced a net loss of 18,000 positions (-0.4%), while New Brunswick and Newfoundland and Labrador saw employment gains of 3,000 (+0.8%) and 2,600 (+1.1%) positions, respectively.

The Bank of Canada’s rate cut: July or September?

While Canada may not be seeing sharp job losses under the weight of high interest rates and a weak economy, that doesn’t change the fact that the June employment numbers were “awful,” says Bruno Valko, VP of national sales for RMG.

“We see this in our industry with clients and their battles to buy homes, renew at higher rates, and so on,” he wrote in a note to subscribers. “Hopefully, now, the economists see our true job market. It is not resilient. It is weak [and] the Bank of Canada will notice.”

BMO Chief Economist Douglas Porter emphasized the data’s significance, stating, “This report drives home the point that the Canadian labour market can simply no longer be considered tight—in fact, it is quickly tipping in the other direction.”

Still, most economists believe the Bank of Canada will tread cautiously before delivering its next anticipated rate cut, which could come as early as its next meeting on July 24, or not until September 4.

“As a standalone result, the softening job market raises the odds of a Bank of Canada rate cut,” Porter wrote. “However, wages remain the very definition of sticky, which will give the Bank pause.”

Average hourly wages in June were $34.91, representing an annual growth rate of 5.4%, up from 5.1% in May.

Porter added that for the BoC to go ahead with a rate cut in July, the June inflation results, to be released on July 16, would need to be “exceptionally tame.” He suggested that while the weak job market sets the stage for further rate cuts later this year, variable-rate mortgage borrowers may not see rate relief this month.

Leslie Preston, an economist at TD, pointed out that key economic indicators due before the BoC’s July 24 rate decision will play a crucial role in determining whether the BoC makes a rate move in July or September.

“In either case, Canada’s economy is not falling off a cliff and we expect rate cuts will be gradual over the remainder of the year,” she wrote.

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Last modified: July 5, 2024

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.