6 Sep

Bank of Canada Holds Rates Steady Acknowledging Economic Slowdown

Posted by: Yen (Frank) Feng

With last Friday’s publication of the anemic second-quarter GDP data, it was obvious that the Bank of Canada would refrain from raising rates at meeting on September 6, 2023. Economic activity declined by 0.2% in Q2; the first quarter growth estimate decreased from 3.1% to 2.6%.

The Bank of Canada’s press release on September 6, 2023 announced, “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.” The Q2 slowdown in output reflected a “marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.”

Lest we get too comfy with a more dovish stance in monetary policy, the central bank warned that the Governing Council remains resolute in its commitment to restoring price stability.

Inflationary pressures remain broad-based. CPI inflation rose to 3.3% in July after falling to 2.8% in June. Much of the rise in July was caused by the statistical base effect. Nevertheless, current harbingers of inflation remain troubling. The increase in gasoline prices in August will boost inflation soon before easing again. “Year-over-year and three-month measures of core inflation are now running at about 3.5%, indicating little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.”

The Bank also continues to normalize its balance sheet by letting maturing bonds run off. This quantitative tightening keeps upward pressure on longer-term interest rates.

Tiff Macklem and company concede that excess demand is diminishing and the labour markets are easing. The unemployment rate rose to 5.5% in July, up from a cycle low of 4.9%, and job vacancies continue to decline. Net exports have slowed, and the Chinese economy has weakened sharply. Consumers are tightening their belts as the saving rate rose and household spending slowed markedly in Q1.

Monetary policy actions have a lagged effect on the economy. As mortgage renewals rise, peaking in 2026, the economic impact of higher interest rates will grow. Homeowners renewing mortgages this year are seeing roughly a doubling in interest rates.

The Governing Council will focus on the movement in excess demand, inflation expectations, wage growth and corporate price decisions.

Bottom Line

The Bank of Canada, though independent, is coming under increasing political pressure. In an unusual move, the premiers of both BC and Ontario have publicly called for a cessation of rate hikes. Even so, the BoC is keeping its hawkish bias to avoid a bond rally that could trigger another boost in the housing market, similar to what we saw last April. The government bond yield is hovering just under 5%, having breached that level recently with the release of robust US economic data.

There are two more meetings before the end of this year, and many are expecting another rate hike in one of those meetings. The odds of this are less than even, given the downward momentum in the economy.

The central bank’s next decision is due October 25, after two releases of jobs, inflation and retail data, gross domestic product numbers for July and an August estimate.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

2 Sep

Rate Hikes Off The Table With Weak Q2 GDP Growth In Canada

Economics Insights

Posted by: Yen (Frank) Feng

The Canadian economy weakened surprisingly more in the second quarter than the market and the Bank of Canada expected. Real GDP edged downward by a 0.2% annual rate in Q2. The consensus was looking for a 1.2% rise. The modest decline followed a downwardly revised 2.6% growth pace in Q1. (Originally, Q1 growth was posted at 3.1%.) According to the latest monthly data, growth dipped by 0.2% in June, and the advance estimate for economic growth in July was essentially unchanged. This implies that the third quarter got off to a weak start.

The Bank of Canada forecasted growth of 1.5% in Q2 and Q3 in its latest Monetary Policy Report released in July. The central bank is now justified in pausing interest rate hikes when it meets again on September 6th. Today’s report is consistent with the recent rise in unemployment. It suggests that excess demand is diminishing, even when accounting for such special dampening factors as the expansive wildfires and the BC port strike.

Some details of Q2 Growth

Housing investment fell 2.1% in Q2, the fifth consecutive quarterly decline, led by a sharp drop in new construction and renovations. No surprise, given the higher borrowing costs and lower demand for mortgage funds, as the BoC raised the overnight rate to 4.75% in Q2. Despite higher mortgage rates, home resale activity rose in Q2, posting the first increase since the last quarter of 2021.

Significantly, the growth in consumer spending slowed appreciably in Q2 and was revised downward in Q1.

Bottom Line

The weakness in today’s data release may be a harbinger of the peak in interest rates. Inflation is still an issue, but the 5% policy rate should be high enough to return inflation to its 2% target in the next year or so. As annual mortgage renewals peak in 2026, the increase in monthly payments will further slow economic activity and break the back of inflation.

The Bank of Canada will be slow to ease monetary policy, cutting rates only gradually–likely beginning in the middle of next year. In the meantime, the central bank will continue to assert its determination to do whatever it takes to achieve sustained disinflationary forces.

Today’s release of the US jobs report for August supports the view that the Canadian overnight rate has peaked at 5%. (The Canadian jobs report is due next Friday). Though the headline number of job gains in the US came in at a higher-than-expected 187,000, the unemployment rate rose to 3.8% as labour force participation picked up, growth in hourly wages was modest, and job gains in June and July were revised downward.

In Canada, 5-year bond yields have fallen to 3.83%, well below their recent peak shown in the chart below.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

16 Aug

July Headline Inflation Rose to 3.3%, But Core Inflation Improved

Economics Insights

Posted by: Yen (Frank) Feng

The Consumer Price Index (CPI) rose 3.3% y/y in July, up from a 2.8% rise in June. The acceleration in headline inflation was widely expected due to a base-year effect on gasoline prices, as a sizeable monthly decline in July 2022 (-9.2%) no longer impacts the 12-month movement. Excluding gasoline, the CPI rose 4.1% from 4.0% in June.

The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the most significant contributor to headline inflation. The all-items excluding mortgage interest cost index rose 2.4% in July.

The CPI rose 0.6% in July, following a 0.1% gain in June, mainly due to higher monthly prices for travel tours, with July being a peak travel month. On a seasonally adjusted monthly basis, the CPI rose 0.5%.

Food price inflation eased last month but remains sticky.

The core inflation measures will hearten the Bank of Canada. CPI-trim eased to 3.6% y/y in July, continuing the downtrend following the November 2022 peak. CPI-median held steady at 3.7%.

The sizable slowdown in other economic indicators suggests that Q2 GDP growth slowed to roughly 1.0% in the second quarter–markedly below the 3.1% pace posted in Q1. Labour markets are also easing with a meaningful drop in job vacancies and a rising unemployment rate.

Bottom Line

It is now likely that when the Bank of Canada meets again on September 6, the Governing Council will announce a pause in rate hikes. They will promise to remain ever vigilant, but there is a good chance that the overnight policy rate has peaked at 5%–up 1900% since March 2022.

We will unlikely see the first drop in the policy rate until June of next year. The Bank will proceed slowly, taking rates down by 25 bp increments. The low in the policy rate will probably be around 3%, well above the pre-pandemic level of 1.75%.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

10 Aug

The Long-Awaited Labour Market Slowdown

Economics Insights

Posted by: Yen (Frank) Feng

The Canadian economy shed 6,400 jobs in July, far weaker than the 25,000 gain that was expected. The jobless rate was 5.5%, the third consecutive monthly rise. This likely improves the chances the Bank of Canada will remain on the sidelines in September.

Wage inflation, however, re-accelerated, moving back to 5.0%. This, combined with the continued stickiness in core inflation, will keep interest rates high for longer.

July’s data follows a surprise gain of 59,900 in June and a 17,300 loss in May, showing that employment is a notoriously volatile series. Nevertheless, it provides the fodder for Macklem to pause again after two consecutive rate hikes.

A downturn in June’s manufacturing, wholesale, and retail data has buoyed the Bank’s hopes that the 475 basis point rate hikes have slowed the economy, especially as preliminary figures for June showed the economy contracting for the first time this year. Inflation rates for the same month moderated to 2.8%, fitting within the central bank’s target range for the first time since March 2021.

Policymakers scrutinize indicators to determine if the current interest rates are sufficiently high to temper economic growth. They perceive substantial wage increases as inconsistent with their goal of reducing inflation to the 2% target. Even amidst recent significant strikes from workers demanding improved remuneration, the outlook hints at a potential slowdown in wage growth. This could be driven by increased immigration, which expands the workforce while the demand for labour diminishes.

Bottom Line

The chances of a rate hike on September 6 have diminished significantly. However, more data is yet to come with July inflation on August 15 and the Q2 GDP figure on September 1.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

19 Jul

Canadian Inflation Falls Within Bank of Canada’s Target Range

Economics Insights

Posted by: Yen (Frank) Feng

June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

7 Jul

Strong Canadian Job Growth in June Will Not Please The Bank of Canada

Economics Insights

Posted by: Yen (Frank) Feng

Employment growth last month came in at a whopping 60,000 jobs, tripling expectations, and most of those net new jobs were for full-time workers. As our population grows, more people are available to fill job vacancies. Employment rose in wholesale and retail trade (+33,000), manufacturing (+27,000), health care and social assistance (+21,000) and transportation and warehousing (+10,000). Meanwhile, declines were recorded in construction (-14,000), educational services (-14,000) and agriculture (-6,000).

The unemployment rate rose 0.2 percentage points to 5.4% in June, following a similar increase (+0.2 percentage points) in May. The increase brought the rate to its highest level since February 2022 (when it was also 5.4%). There were 1.1 million people unemployed in June, an increase of 54,000 (+4.9%) in the month.

The population grew by 0.3%, the labour force rose by 0.5%, and employment increased by 0.3%. The participation rate increased by 0.2 percentage points to 65.7%.

Despite the successive increases in May and June, the unemployment rate in Canada remained below its pre-COVID-19 pandemic average of 5.7% recorded in the 12 months to February 2020.

One thing the Bank of Canada will be happy about is that wage inflation slowed to 4.2% on a year-over-year basis following four consecutive months of more than 5% wage growth. This is good news for the Bank, but not good enough given that wages are still rising at more than double the inflation target of 2.0%.

Bottom Line

Traders are now betting that there is a 70% chance that the Bank of Canada will hike the policy rate by 25 basis points on July 12, taking the overnight rate to 5.0%. Given that many consumers are feeling the pinch of rising prices, and the June housing data appears to have softened, at least in the GTA, the Bank could surprise us again by remaining on the sidelines. After all, inflation fell to 3.4% in May, and the Business Outlook Survey softened broadly, particularly regarding hiring intentions.

In contrast, the latest monthly GDP report showed an uptick in growth in May. Remembering that Q1 growth came in nearly one percentage point above the Bank’s forecast in the April Monetary Policy Report (MPR) and all six Canadian bank economists are forecasting a rate hike, the Bank might want to take out a bit more insurance that inflation will return to the 2% target next year.

A fresh MPR will accompany next week’s policy announcement and press conference. It’s unclear which way the Bank will go, but the odds favour a rate hike.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

28 Jun

Will the May Inflation Decline Thwart Another Rate Hike in July?

Economics Insights

Posted by: Yen (Frank) Feng

The May inflation data, released this morning by Statistics Canada, bore no surprises. The year-over-year (y/y) inflation measured by the Consumer Price Index (CPI) at 3.4% was just as expected–down a full percentage point from the April reading. This is the smallest increase since June 2021. Economists hit this one on the head because we knew dropping the April 2022 figure from the y/y calculation would considerably lower May inflation.

By May of last year, y/y inflation had already risen sharply to 7.7%, mainly due to dramatic energy price increases reflecting the impact of the Russian invasion of Ukraine. Inflation peaked at 8.1% in June ’22, suggesting low inflation next month as well. This is why the Bank of Canada predicted that inflation would fall to 3% by this summer.

Taking inflation down to 3% will likely be easier than the drop from 3% to 2% because the low-hanging fruit has already been harvested. Many service prices are a lot stickier than the price of commodities and durable goods.

The May inflation slowdown was primarily driven by the 18.3% y/y plunge in gasoline prices resulting from the base-year effect. Excluding gasoline, the CPI rose 4.4% in May, following a 4.9% increase in April. A drop in natural gas prices (-3.5%) also contributed to the energy price deceleration.

Prices for durable goods grew at a slower pace year over year in May, rising 1.0% after increasing 2.2% in April. The increase in May is the smallest since May 2020 and coincided with easing supply chain pressures compared with a year ago. This was reflected in furniture prices (-2.9%), which fell by the largest amount since June 2020, and passenger vehicle prices (+3.2%), which showed the smallest increase since February 2021.

Grocery prices remain elevated–up 9.0% y/y–down only one tick from April. Prices for food purchased from restaurants rose slightly faster year-over-year in May (+6.8%) than in April (+6.4%), amid ongoing elevated labour shortages, input costs and expenses, which Stats Can data show job vacancies can disproportionately affect these businesses.

Rising interest rates also boost inflation. This is because mortgage costs are just over 3% of the CPI. They are a part of the most significant component of the index–shelter–which represents almost 30% of the index. The mortgage interest cost index rose by a whopping 29.9% in May, following a 28.5% increase in April. This was the largest increase on record for the third consecutive month, as Canadians continued to renew and initiate mortgages at higher interest rates. And, of course, this does not include the effects of the policy rate hike in June.

It takes time for the full effect of interest rate hikes entirely feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed. And home-buying related expenses ticked higher in May, with higher home resale prices increasing realtor and broker commissions.

Bottom Line

Achieving the 2% inflation target will take some effort. The Bank of Canada continues to be concerned that the Canadian economy remains too hot. Although unemployment relative to job vacancies has recently started to rise, the Bank remains troubled that excess demand will continue to push some prices upward. This is the cyclical component of inflation–inversely correlated with the unemployment rate–a version the Fed calls ‘supercore’ inflation. Supercore includes household services such as haircuts, personal care, babysitting, restaurant meals, travel, accommodation, recreation and entertainment.

It is roughly the CPI-trim (which filters out extreme price movements that might be caused by severe weather and other temporary factors) minus the price of food, shelter and energy. This measure has fallen less than the other core measures. Supercore inflation is about 5.5% y/y, compared to CPI-trim at 3.8%,CPI- median at 3.9% (see the chart below).

Looking at the recent monthly trends on a three-month annualized basis, CPI-trim was at 3.8% in May, down from 3.9%, and CPI-median was at 3.6%, down from 3.8% in April.

This is why the Bank of Canada emphasizes labour market data and overall spending measures. We will get two more important Statistics Canada releases before the July 12th BoC decision: the June 30th monthly GDP number for April and the all-important Labour Force Survey on July 7th. Unless these data show a meaningful economic slowdown or a rise in unemployment, the odds of another BoC rate hike are about 60%.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

23 Jun

Strong May Housing Market Likely Triggered Recent BoC Rate Hike

Economics Insights

Posted by: Yen (Frank) Feng

The Canadian Real Estate Association says home sales in May rose 5.1% month-over-month (m/m), adding to the 11.1% gain in April. This brought the year-over-year sales gain to 1.4%, The first y/y sales increase in almost two years. While spring home sales started booming (compared to the past year), the surprising 25 bps uptick in the Bank of Canada’s policy rate has no doubt dampened enthusiasm in June. Indeed, the strength in housing may have been the deciding factor in the Bank’s decision.

Sales were up in about 70% of all local markets, including Canada’s largest markets: the Greater Toronto Area (GTA), Montreal, Greater Vancouver, Calgary, Edmonton, and Ottawa.

New Listings

The number of newly listed homes was up 6.8% month-over-month in May, although the bigger picture is that new supply is still running at historically low levels.

With sales and new listings up by similar magnitudes in May, the sales-to-new listings ratio was 67.9%, little changed from 69% in April. The long-term average for this measure is 55.1%.

There were 3.1 months of inventory on a national basis at the end of May 2023, down from 3.3 months at the end of April and down more than an entire month from the most recent peak at the end of January. The long-term average for this measure is about five months.

The dearth of sellers could reflect the reluctance of existing homeowners to give up their low-rate mortgages.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 2.1% on a month-over-month basis in May 2023 – a significant increase for a single month and on the heels of a similar gain in April. Once again, it was also very broad-based, with a monthly price increase between April and May observed in most local markets.

The Aggregate Composite MLS® HPI now sits 8.6% below year-ago levels, a smaller decline than in the first four months of this year. The second chart below shows that year-over-year price gains are posted at the national level and in BC, Alberta, and Nova Scotia. With the strength in the GTA, y/y prices are fast approaching positive territory.

Bottom Line

The rate hike by the BoC has spooked the housing market. Anecdotal evidence suggests that activity has slowed, and the demand for fixed-rate mortgages has surged. Many households now face higher monthly payments in the next two years. The Bank of Canada knows that and wants to see household spending slow from the rapid Q1 pace. Consumer confidence has risen sharply since March. But with household debt-to-income levels at near-record highs, the sensitivity to interest rates is extreme.

Ironically, just as the BoC raised rates again after months of no action, the Federal Reserve decided to pause rate hikes for the first time this cycle. US inflation peaked at over 9.1% and fell to 4.0% in May. While Canadian inflation topped at 8.1%, its most recent posting was 4.4% in April. May data for Canada will be released on June 27.

Traders are currently expecting one more rate hike in Canada this year. The idea that the Bank would cut rates any time this year has vanished. Most are betting the first rate cut is more likely to be in mid-2024. We have learned that uncertainty prevails, but I’d bet that we will not return to pre-Covid interest rates for a very long time.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

31 May

Good News Is Bad News For The Bank Of Canada

Economics Insights

Posted by: Yen (Frank) Feng

The Canadian economy continues to show marked resilience to high-interest rates. Statistics Canada released data this morning showing real GDP rose at an above-consensus 3.1% annual rate in the first quarter of this year. The estimate for April growth was also firm, a harbinger of continued strength in Q2. The combined drags of the public sector strike and the Alberta wildfires didn’t cause a significant downdraft.

First-quarter growth was driven by strong international trade and robust household spending. These factors were partly mitigated by slower inventory accumulation and declines in new housing construction and business investment in machinery and equipment.

After two quarters of minimal growth, household spending rose for goods (+1.5%) and services (+1.3%) in the first quarter of 2023. Expenditures on durable goods (+3.3%) were driven by motor vehicles, including new trucks, vans, and sport utility vehicles (+7.8%). Spending on semi-durables (+4.3%) was led by garments (+4.5%), while spending on non-durable goods (-0.2%) declined slightly.

Service spending picked up in the first quarter of 2023, led by food and non-alcoholic beverage services (+4.4%), and alcoholic beverage services (+6.5%). Meanwhile, travel was on the rise, with expenditures by Canadians abroad up 6.8% in the first quarter, compared with a 3.3% decrease in the previous quarter.

These data do not portend a household sector overly burdened by rising mortgage and credit card payments.

Coinciding with higher borrowing costs and slowing mortgage borrowing, housing investment fell 3.9% in the first quarter of 2023, the fourth consecutive quarterly decrease. The decline in investment was widespread—as new construction (-6.0%), renovations (-2.1%), and ownership transfer costs (-1.5%), which represents resale activity, were all down.

We know housing activity has picked up considerably since the first quarter, undoubtedly adding to Q2 growth. Also expansionary is the persistent rise in employee compensation, led by salary gains in professional and personal services, manufacturing and construction.

One warning sign is the declining household savings rates and slower disposable income. Persistently high interest rates had a predominantly negative effect on net property income, as increases in interest income (+6.4%), mainly from deposits, did not keep pace with higher interest payments on mortgages (+14.7%) and consumer credit (+10.9%).

In contrast with lower disposable income, consumption expenditures (in nominal terms) rose 2.1% in the first quarter of 2023. This was faster than the 1.4% pace recorded in the fourth quarter of 2022, partly due to inflationary pressures. As a result, the household saving rate was 2.9% in the first quarter of 2023, down from 5.8% at the end of 2022. The household saving rate approached the pre-pandemic level, which averaged 2.1% in 2019.

Business incomes fell significantly in Q1, and judging from the stock market, corporate earnings news has also been disappointing across a wide array of sectors in the second quarter.

Bottom Line

The strength in today’s data and the higher-than-expected inflation number for April will cause the Bank of Canada to seriously consider raising the overnight rate by 25 bps to 4.75% when they meet again next week. I think they will hold off to see the May employment and inflation data before they pull the trigger.

Markets have already responded to the numbers. Short-term interest rates remain well above levels posted earlier this year, although that is mainly about the debt-ceiling issue in the U.S. The Bank’s statement will undoubtedly be rather hawkish.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

15 May

High Interest Rates Have Not Slowed the Labour Market Sufficiently

Economics Insights

Posted by: Yen (Frank) Feng

The Canadian labour market has done it again, blowing past expectations for the fifth straight month. In April, a whopping 41,400 new jobs were added, more than double what economists predicted. Since February, monthly employment growth has averaged 33,000, following cumulative increases of 219,000 in December 2022 and January 2023.

The employment rate—the share of the population aged 15 and older—held steady at 62.4% for the third consecutive month in April. This is particularly noteworthy given the population grew by more than a million people in 2022 and is slated to snowball this year, thanks to immigration.

However, there is a catch. All the job growth in April was in part-time positions, while full-time jobs decreased by 6,200. But even with this slight hiccup, the labour market is still going strong, which means the Bank of Canada will likely continue its wait-and-see approach, even as we all wonder when the first rate cut will happen.

The jobless rate held steady at a near-record low of 5.0%, unchanged since December 2022. This remained near the record low of 4.9% observed in June and July 2022. Compared with April 2022, the unemployment rate was down 0.3 percentage points in April 2023.

Wage Inflation Remains High

Of great concern to the Bank of Canada, average hourly wages rose by 5.2% on a yearly basis in a further sign of the labour market’s resilience, with wage growth now above the annual rate of inflation, which was 4.3% in March. It is not that wage inflation caused the surge in the Consumer Price Index last year, but continued vigorous wage hikes become impended in wage-price spiralling as higher costs give businesses cover to rate prices.

Bottom Line

The BoC, despite this report, isn’t likely to budge from its current policy stance. As more and more immigrants enter the workforce, the traditional markers of a strong jobs report are evolving. Even though the unemployment rate remains steady at 5%, it may indicate that we’ve hit a new equilibrium point. That’s why this seemingly “surprising” report doesn’t hold the same weight as it would have in the past.

In addition, the BoC can quickly point out the narrowness of sector hiring and the trend of full-time employment declining while part-time jobs rise. After today’s release, the BoC’s decision to stay on the sidelines is a wise move. But it also means that the Bank will not be in a hurry to cut rates this year.

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres