Canada: Strong Hiring Momentum Keeps Markets on the Fence About a March Rate Cut

Trade uncertainties did not disrupt the strong hiring momentum as Canada entered 2025. For the third consecutive month, job gains in Canada have exceeded consensus expectations, highlighting the strength of the labour market following the Bank of Canada’s 200 basis points in rate cuts since last spring. Job gains were broad-based, with increases concentrated in manufacturing (+33k), professional, scientific, and technical services (+22k), and construction (+19k). By province, Ontario (+39k) and British Columbia (+23.5k) saw the largest gains, while Alberta experienced a slight job loss (-4k). Despite a slight pickup in the participation rate from 65.4% to 65.5% in January, the labour market added more jobs in January than there were new workers as population growth continues to weaken (graph 1). This pushed the unemployment rate down from 6.7% to 6.6%. The unemployment rate for the younger population declined from 14.2% to 13.6%, while it remained steady for other age groups.

Working-age population growth continued to slow in January, particularly among younger demographics (graph 2) due to a sustained decline in the intake of non-permanent residents (NPRs). This trend is driven by the federal government's plan to reduce the share of NPRs and immigration. However, our population projection External link. suggests that the Government of Canada will need to implement more aggressive reductions in NPR numbers to meet its ambitious targets, which, if achieved, could result in negative population growth in 2025 and 2026. Our projection aligns closely with the central bank's updated outlook, which has been revised down to account for these measures and now assumes population growth will slow to 0.5% by 2026.

Despite robust hiring, average wage growth decelerated to 3.5% y/y in January, down from 4.0% in December (graph 3), marking the slowest growth since May 2022. The cooling wage gains provides the central bank with some flexibility to maneuver, although there will be one more job report before the next Bank of Canada decision on March 12th.

Despite the strength carrying over into the first quarter of 2025, we expect hiring to cool throughout the year, compounded by increasing trade uncertainties, particularly in vulnerable sectors. Anecdotal evidence suggests businesses began to resort to layoffs in anticipation of US tariffs. While January’s robust labour market report has boosted our tracking for Q1 2025 real GDP growth, the mounting economic uncertainties on the horizon signal significant downside risks. While we believe that will prompt ongoing easing by the Bank of Canada, the stronger January jobs data combined with sustained trade tensions make the likelihood of another rate cut in March a bit coin flip until there is more certainty as to tariffs being implemented.