Canada: Rising Unemployment Rate Supports Another Rate Cut in July

Still-torrid population gains continue to be a mixed bag for Canada’s economy and inflation outlook. They remain a tailwind for economic activity, which could potentially slow the pace of disinflation, especially in an environment of limited housing supply. But they’ve also helped fill job vacancies and kept a lid on wage pressures. Ottawa’s plan to lower the temporary resident population External link. by 20% should reduce the primary driver of recent demographic gains later in 2024 and beyond.

Although Ontario witnessed the strongest job gains of any province last month, its labour market has arguably built up the most slack since the start of last year (graph 2). Rises in BC’s unemployment rate have also generally outpaced the national average over that span, in line with our view—detailed in the latest Desjardins Provincial Outlook External link.—that the most interest rate-sensitive provincial economies will feel the coming economic slowdown most.

May’s pickup in wage growth is less positive from the perspective of controlling price pressures, but there are additional points to consider. The central bank noted this week that it was continuing to watch wage gains (despite signs of gradual progress towards stabilization). However, the BoC looks to a broad group of wage indicators when making decisions on the direction of monetary policy, most of which show a more contained pace of compensation gains. Moreover, the fact that corporate profits registered a fifth consecutive year-over-year decline in Q1 suggests that higher wage costs are not being transmitted fully into consumer prices. 

Ultimately, May jobs’ data don’t change our view that the BoC will reduce its policy rate again in July. Although wage pressures remain a risk to watch, the labour market is still softening and inflation is easing. The Bank should—for now—take comfort in these trends.