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Randall Bartlett
Senior Director of Canadian Economics
Economic News
Canada: Positive Headline Jobs Data Won’t Derail a 50-Basis Point Rate Cut
October 11, 2024
Highlights
- Total Canadian employment rose by 47k jobs in September 2024, nearly double the 27k expected by economic forecasters. The unemployment rate moved down one tick to 6.5%, reversing August’s increase. Total hours worked edged lower in September (-0.4%) but were still up 1.2% over the prior year, while average hourly wages slowed to 4.6% y/y in the month. Table 1 summarizes key data points.
- Our Q3 2024 forecast for real Canadian GDP growth edged slightly higher to around 1.2% but remains well below the 2.8% annualized gain forecast in the Bank of Canada’s (BoC) recent Monetary Policy Report.
Implications
For the second consecutive month, job gains in Canada have bested consensus and have more than shaken off the weakness in June and July. Job gains were concentrated in services, particularly information, culture and recreation (22k), wholesale and retail trade (22k) and professional, scientific and technical services (21k). All of the gains were in full-time jobs (112k), more than offsetting the drop in part-time employment (-65k), with hiring of private employees (61k) making another notable advance in September.
While September’s employment gain was welcome, it wasn’t nearly enough to keep up with population growth, helping to push the employment rate lower for the fifth consecutive month. But when combined with the participation rate falling two ticks in the month (to 64.9%), the unemployment rate inevitably edged down slightly. While the decrease in the unemployment rate was concentrated among younger workers (ages 15 to 24 years), down a full percentage point to 13.5%, the advance in the unemployment rate among prime-aged workers arrested some of the drop (graph 1). Reassuringly, this wasn’t due to weaker hiring within that latter age category, which rose by 34k for the second consecutive month. The most recent newcomers to Canada also saw their employment conditions improve in the month, although not enough to reverse the weakness building throughout the year.
Still skyrocketing population gains continued in September, well outpacing labour demand (graph 2). However, if the federal government is successful in reducing the number of non-permanents residents to 5% of the population over the next three years, that should weigh on real GDP growth and inflation, supporting ongoing rate cuts by the Bank of Canada.
Despite the torrid pace of population gains, the wage growth of permanent employees remains well above the pace of inflation, albeit the slowest year-over-year growth since June 2023 at 4.5% y/y. While this would normally be more concerning for the Bank of Canada, the Bank puts by far the least weight on the Labour Force Survey as a measure of wage growth, instead preferring the National External link. and Productivity External link. Accounts. And in each of these cases, wage growth has been much lower than in the Labour Force Survey (graph 3). Regardless, these wage indicators show than Canadian are clawing back some of the real wages lost during the recent bout of high inflation.
With inflation having returned to the Bank of Canada’s 2% target in August, the labour market has taken on increased importance. And while the September data indicates the labour market may not be ready to throw in the towel just yet, our tracking is for a much weaker real GDP growth print in Q3 than the Bank of Canada’s most recent forecast. Given this added economic slack, we remain of the view that the Bank will cut the policy rate by 50 basis point (bps) in October. This should be followed another 25bps in December, and likely six more in 2025. But if the labour market starts exhibiting greater weakness going forward, the question will not be if the Bank continues to cut rates but if the pace of rate cuts will need to accelerate relative to our and market expectations.