Bank of Canada expected to take its time with interest rate cuts after January jobs gain

Nojoud Al Mallees, Canadian Press

Posted on Friday, February 9, 2024 at 8:48 am EST

Last updated Friday February 9, 2024 2:29 pm EST

OTTAWA – The Bank of Canada will be in no rush to cut interest rates after Statistics Canada reported a bigger-than-expected employment gain last month, economists say.

The federal agency’s labor force survey released Friday said the economy added 37,000 jobs in January after several months of relatively no change in employment.

Canada’s unemployment rate fell to 5.7 per cent last month, marking the first drop since December 2022.

“I would classify the labor market as tighter than expected, but not necessarily stronger than expected,” said Andrew Grantham, executive director of economics at CIBC.

“That’s because, yes, employment continued to grow a little faster than the consensus expected. But it really pales in comparison to the huge increase in population.”

Canada’s population aged 15 and older grew 0.4 per cent between December and January, far outpacing employment growth of 0.2 per cent.

The labor market cooled significantly in 2023 as high interest rates hit consumer spending and business investment, raising the unemployment rate from 5.1 percent in April to 5.8 percent in December.

Brendon Bernard, senior economist at recruiting website Indeed, says the unemployment rate, however, does not give a complete picture of the state of the labor market. This is because it only measures the proportion of unemployed people among those actively seeking work.

The Statistics Canada report emphasized that the employment rate, which measures the proportion of the working-age population that is employed, has been declining for four consecutive months, including January.

“I think it’s probably a better barometer of the direction of the labor market,” Bernard said.

Still, the relatively decent state of the labor market suggests to economists that the central bank can take its time in cutting interest rates.

“Today’s data is certainly not going to accelerate the Bank of Canada’s timeline,” Grantham said.

The Canadian economy also appeared to end 2023 on a stronger note than expected.

Statistics Canada reported Wednesday that the economy grew 0.2 per cent in November, marking the first expansion in six months.

A preliminary estimate suggests that real gross domestic product rose 1.2 percent on an annualized basis in the fourth quarter, following a decline of similar magnitude in the third quarter.

Last month, the Bank of Canada opted to keep its key interest rate at five per cent and signaled that it is moving closer to rate cut considerations.

However, Governor Tiff Macklem expressed concern about sticky inflation and warned that the central bank will be willing to raise rates if price growth does not cooperate.

CIBC is not changing its forecast on the timing of the first rate cut, as it still anticipates the central bank will reduce its key rate starting in June. But he now expects the bank to cut rates across the board this year.

Employment increased in several sectors in January, led by wholesale and retail trade, as well as finance, insurance, real estate, and rental and leasing.

Meanwhile, accommodation and food services saw the biggest drop in employment.

Workers’ wages continued to grow rapidly last month as Canadians sought compensation for past inflation. Average hourly wages, which have been growing steadily at an annual rate of between four and five percent, increased 5.3 percent from a year earlier.

Statistics Canada says wage growth has been strongest for women and high earners. Although men continue to earn more than women on average, women’s average hourly wages increased 6.2 percent compared to 4.4 percent for men.

For employees in the top 25 percent of the wage distribution, their wages grew 5.9 percent compared to 4.6 percent for those in the bottom 25 percent.

Canada’s labor market has been supported by strong population growth, driven by permanent and temporary immigration.

Compared with a year ago, the economy added 345,000 jobs, while the working-age population expanded by one million people.

While the Bank of Canada maintains its reference rate, economists’ forecasts suggest that unemployment will increase throughout this year.

This report by The Canadian Press was first published Feb. 9, 2024.

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