Further weakness in the jobs market in March should prompt the Bank of Canada to begin lowering interest rates in the not too distant future, perhaps as early as June.
The unemployment rate crossed the 6% threshold in Canada last month, while the number of jobs fell for the first time in eight months. At 6.1%, the unemployment rate is now at its highest level since January 2022. In Quebec, the unemployment rate increased from 4.7% in February to 5% in March.
This increase in the unemployment rate in Canada, the highest in 19 months, is higher than economists predicted and it revives expectations of an imminent drop in interest rates.
“The Bank of Canada will not change the key rate next week, but leaders could start to suggest that rate cuts are not very far away,” said Roy Mendes, general manager and head of macroeconomic strategy at Desjardins.
The Labor Force Survey for March is the last before the central bank’s next decision on April 10. Even though the key rate is expected to remain unchanged at 5%, Governor Tiff Macklem’s message should open the door to an initial cut in the key rate.
PHOTO BLAIR GABLE, REUTERS ARCHIVES
Tiff Macklem, Governor of the Bank of Canada
In his last decision, the governor of the Bank of Canada argued that it was too early to even consider cutting rates, but in the minutes of the discussions that preceded this decision, the bank’s board of directors had considered the possibility of a reduction in the key rate.
The increase in the unemployment rate in March adds to the two consecutive month decline in inflation, in January and February, to convince the Bank of Canada that the time has come to throw in some ballast.
The Bank of Canada runs the risk of maintaining a restrictive monetary policy for too long. This could plunge the economy into an unnecessary recession.
Roy Mendes, general manager and head of macroeconomic strategy at Desjardins
Economists at Desjardins and those at the National Bank recently published analyzes which argue that the Bank of Canada overestimates real inflation, with the risk that it will maintain high rates for longer than necessary.
Quebec loses 18,000 jobs
Across the country, the number of jobs fell by 2,200 in March, but the decline was much more pronounced in Quebec, which lost 18,000 jobs. The accommodation and food services and retail sectors lost the most jobs. Employment increased in the health care sector and in construction.
In Quebec, the deterioration of the job market in March mainly affected young people. Over the past year, the number of jobs has remained stable in the province while the working age population has increased by 2.1%.
“We expected the contraction in economic activity to materialize in the labor market, but the drop in employment in March is particularly marked,” commented Florence Jean-Jacob, senior economist at Desjardins.
Beyond monthly variations, the last quarter of 2023 and the first quarter of 2024 resulted in job losses in Quebec, she underlines.
Despite everything, Quebec’s unemployment rate is the lowest among the provinces, tied with Manitoba, and well below the national average of 6.1%.
This was not the case until recently, but the job market now reflects the weakness of the Canadian economy. Over the past year, employment has grown more rapidly in the public sector (+4.8%), while the private sector stagnates with an increase of 1.1% in the number of jobs.
The number of jobs has increased by 1.6% in Canada over the past year, but the working-age population has increased twice as much, at 3.2%.
Wages
Statistics Canada reports a new increase in average hourly wages, of 5.1%, following a 5% increase in February. In Quebec, the increase is more modest, at 4.6%.
This significant increase in wages, well above the inflation rate of 2.8%, concerns the Bank of Canada and could delay rate cuts, as does economic growth which turned out to be higher than its forecasts at the start of 2024 Gross domestic product grew 0.6% in January and preliminary data points to an increase of 0.4% in February.
Most economists still expect a rate cut in June, or at mid-year for the most cautious. Interest rate decisions are scheduled for June 5 and July 24. In July, the decision will be accompanied by the central bank’s quarterly report on the state of the economy, which would be the best time to announce the change in monetary policy course.