I have bad good news for you.
Posted at 6:30 a.m.
A what ? Good news that turns out to be bad these days. I would never have thought to tell you this, but here we are, the economic situation is changing, as is the interpretation that we have of it.
On Friday, Statistics Canada revealed that the job market continues to be strong and wages are rising sharply. More specifically, 40,000 jobs were created in Canada in May, after 15,000 in April.
As for the wages of permanent employees, they rose again by 4.5% in May, after April’s 3.4%.
It’s almost discouraging.
Sorry ? But yes, normally, economists and financiers welcome such an increase, happy to see that everyone is working, pocketing better pay and paying taxes. The problem is that these elements are likely to feed the number one enemy of the economy today: inflation.
And that this inflation out of control is likely to encourage the Bank of Canada to raise interest rates even more, with its negative repercussions on the real estate market, household finances and the stock market.
Yesterday, for example, the US Department of Labor announced that annual inflation rose to 8.6% in May in the United States, a 40-year high, beating expectations of 8.3%. The increase is widespread, affecting gasoline, food and everything else. Worse, the monthly jump between April and May is 1%, which corresponds to an annualized rate of about 12%. Ouch!
Result ? Stock markets crashed, and not just a little. The S&P 500 Index – the US market’s flagship index – fell 2.9% on Friday. This drop adds to the general declines since January and has now reached almost 19%.
Canada felt the pinch, with the S&P TSX index down 1.4% on Friday (down 4.5% since January).
Why these falls? Because investors fear that these new signs of inflation will call for stronger central bank intervention, undermine corporate profit margins and eventually trigger a recession.
In short, all observers are waiting for the signal of an easing of the economy, of employment, of inflation, which will mean that the policy of the Bank of Canada and the American Federal Reserve works, that the economy is about to land softly, rather than crash.
“A slowdown in the hiring cycle would be welcome on both sides of the border,” said the National Bank’s chief economist, Stéfane Marion.
According to him, it is difficult to predict a significant drop in inflation in the United States before the end of the summer, when China reopens its economy – still battered by COVID-19 –, which will have the effect of relieve supply chains. Recent indicators point to another key rate hike of at least 50 basis points in Canada in July, Mr. Marion believes.
That said, recent news is not just “discouraging” when it comes to inflation. Overall employment rose on Friday, but the private sector lost 95,000 jobs in Canada.
Stéfane Marion sees this as a sign that the rise in interest rates is beginning to have an effect, judging that companies, faced with rising costs and financing rates, are tightening hiring, a question of maintaining profit margins.
We will have to be patient, all the same, since according to the Governor of the Bank of Canada, Tiff Macklem, it will take “a year and a half to two years before [les] tools have their full effect on the economy,” he explained to my colleague Hélène Baril on Thursday. The inflation rate will still have started to fall before that date, he believes.
The key economic news published on Friday also calls for nuances. First, the average 4.5% increase in wages for permanent jobs in Canada is not only attributable to inflation.
Statistics Canada notes that the employment pool today is not the same as before the pandemic: there are more jobs in Canada in paying sectors (professional and technical services, finance, etc.) and fewer in less paid sectors (catering, accommodation, etc.).
In other words, the wage boom is also attributable to this change, this composition effect, and not only to inflation. Wages in professional and technical services have jumped some 12% over three years, compared to less than 9% for the accommodation and food service sector. These increases compare to a jump in inflation of 10.5% over three years.
The 4.5% wage increase over the past year is probably closer to 4% if this composition effect is taken into account, estimates Stéfane Marion. In comparison, the jump in wages in the United States – composition effect excluded – is around 6.6%.
Another aspect to consider: the notable differences between provinces in Canada. In particular, the annual wage increase in May reached 6.9% in Quebec, against 3.3% in Ontario, estimates the Institut de la statistique du Québec.
There is probably a stronger composition effect in Quebec than elsewhere, but the wage boom here is also explained by the weak relative growth of the labor force (+ 1.3%) compared to that of Ontario (+ 3.4%), especially immigrants, believes Mr. Marion.
I would never have thought to tell you this, but here we are, today, we have to hope for job losses, in a way. Funny period!