Canada: Modest Job Losses Help Make the Case for Another Rate Cut

Quebec drove most of the job losses recorded in June, but we’re still seeing labour markets weaken across most of the country. The last Desjardins Provincial Outlook External link. argued that the most interest rate-sensitive provincial economies will feel the coming economic slowdown most, and that remains our view. However, employment growth is lagging headcount gains in all four of the largest provinces (graph 2), and gaps in Quebec and Alberta have recently been catching up to those in housing-oriented Ontario and BC.

Population gains were yet again exceptionally strong across the country, but we still suspect that effect will fade as the year progresses. That’s largely because of Ottawa’s plan to lower the temporary resident population External link.—the principal driver of recent demographic gains External link.—by around 20% by the end of 2026. Once that policy begins to take hold, we should see an easing of the population-induced tailwind for economic activity. That could further cool inflation as well as ease rental market tightness in an environment of limited housing supply. But temporary labour has also helped fill job vacancies External link. and kept a lid on wage pressures.

Another acceleration in permanent employees’ wage growth (graph 3) isn’t ideal from an inflation control perspective, but we highlight again that there are additional points to consider. Although this indicator is an important element of the BoC’s tracking of potential wage-push inflation, the Bank looks to a broad group of compensation measures when making decisions on the direction of monetary policy. Many of those are still showing a more moderate rate of growth. Public sector compensation is also making a larger contribution to headline wage gains than in the past External link., which we expect the Bank of Canada to look through. 

Ultimately, this morning’s data don’t change our view that the BoC will reduce its policy rate later this month. Although inflation picked up in May and some wage-related risks remain, it’s obvious that the labour market is softening across the country. That should support efforts to contain price pressures in the months ahead.