Canada: Labour Market Weakness Continues,
and So Should Rate Cuts

July 2024 gave us another downbeat print following June’s mostly negative numbers. Some indicators were somewhat positive: full-time positions increased and year-over-year gains in hours worked accelerated. But the labour force participation rate fell to its lowest level since 1998 (excluding the pandemic). This decline appears to reflect youth becoming discouraged by tough labour market conditions for new entrants External link.. This group’s unemployment rate shot up to its highest non-pandemic rate in over a decade.

Working-age population gains continued to skyrocket across the country, but we’re still not sure how long that can continue. We recently argued that Ottawa’s plan to lower the temporary resident population External link.—the principal driver of recent demographic gains External link.—by 20% by the end of 2026 will weigh down growth in all provinces External link.. That could put downward pressure on inflation External link. but also open up new job vacancies External link.. As it stands, Alberta is seeing the strongest population growth in Canada, but job creation is lagging headcounts gains in all four of the largest provinces.

Permanent employees’ wage growth remains well above the pace of inflation (graph), but there are additional points to consider with respect to price control efforts. Although this indicator is an important part of the BoC’s tracking of potential wage-push inflation, other compensation measures are growing at a more moderate pace. Indeed, the outsized gain in public sector jobs in July further reinforces our finding External link. that wage growth is increasingly reflecting government hiring.

While we’ve only received a handful of data points for Q3, our tracking still suggests much weaker growth in the quarter than the BoC has pencilled in. In line with BoC forecast communications, recent international trade data signal strong exports External link. in response to the opening of the Trans Mountain Pipeline Expansion (TMX). However, we also expect the effects of interest rate hikes already completed will continue to hold back strong gains in consumer and housing demand in the coming months. Indeed, weakness in wholesale and retail job creation in July (-44k) point to a consumer that is increasingly struggling with higher costs and an uncertain outlook.

In all, despite some lingering upside risk to inflation, today’s data don’t change our view that the BoC will reduce its policy rate in September. The labour market is still softening across the country, a trend we expect to continue in the months ahead and support efforts to contain price pressures.