Canada’s unemployment rate edged up to 6.6% in August, marking its highest level in seven years, excluding the pandemic years of 2020 and 2021. This rise in joblessness has led economists to urge the Bank of Canada to implement more substantial interest rate cuts.
The Bank of Canada recently reduced its key policy rate by 25 basis points to 4.25%, marking its third consecutive rate cut. Governor Tiff Macklem has hinted that even deeper cuts could be implemented if the economy requires further support. However, the latest job numbers have fueled concerns about the economy’s health. Although the economy added 22,100 jobs in August, a rebound from the previous month’s decline, this growth was entirely driven by part-time employment. This suggests a weakening labor market, particularly as analysts had anticipated a higher rate of job creation.
Experts, including Royce Mendes, head of macro strategy at Desjardins Group, believe that the central bank may need to lower the policy rate by 50 basis points in October to prevent the economy from falling behind. They argue that a larger cut is necessary to stimulate growth and address the rising unemployment. Financial markets have adjusted their expectations for a rate cut in October, now reflecting a 93% likelihood, down from 98% prior to the announcement.
Despite the central bank’s efforts, the Canadian dollar weakened by 0.13% against the US dollar, reaching C$1.3520. Yields on the two-year government bond also declined. The rise in unemployment since January 2023, reaching a 1.6 percentage point increase, has alarmed economists. The situation is particularly concerning for young people aged 15 to 24, who have experienced the largest year-over-year increase in unemployment.
Slow employment growth is a potential factor that could temper robust GDP growth projections for the third quarter. Governor Macklem has acknowledged this concern, highlighting that economic growth has flattened out in June and July. As GDP growth has lagged population growth, unemployment has climbed, raising fears of a recession. Further compounding these concerns, the employment rate has been steadily declining, reaching 60.8% in August, a trend that has persisted for 10 of the last 11 months.
While the central bank grapples with these economic challenges, it is closely monitoring wage growth, which has played a role in keeping inflation high. The average hourly wage growth of permanent employees slowed to an annual rate of 4.9% in August, down from 5.2% in July. The Bank of Canada remains watchful of this crucial economic indicator as it strives to navigate the delicate balance of managing inflation and fostering economic growth.
