Jump in unemployment rate puts Bank of Canada in a ‘tricky spot’. Here’s why

The Canadian unemployment rate jumped up to 6.1 per cent in March amid rapid growth in the labour pool, Statistics Canada said Friday.

Canadian employers collectively shed 2,200 jobs last month but employment was little changed in the month, the agency said.

Canada’s unemployment rate was 5.8 per cent in February.

The spike in the unemployment rate – a full percentage point higher than where it stood a year ago – is tied to an additional 60,000 people looking for work or on temporary layoff in March, StatCan said. Last month the agency reported that, as of Jan. 1, Canada’s annual population growth hit its fastest rate since 1957.

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The consensus of economist expectations called for 25,000 jobs gained last month and a more modest increase in the unemployment rate to 5.9 per cent.

Youth aged 15-24 bore the brunt of contraction with 28,000 jobs lost in March.

StatCan said the food and accommodation services, wholesale and retail trade, and professional, scientific and technical industries led job losses in the month, offset by gains in healthcare and social assistance.

Average hourly wages were up 5.1 per cent year-over-year, a slight acceleration from 5.0 per cent in February.

The latest employment data comes days before the Bank of Canada’s next interest rate announcement, which is set for April 10.

The central bank has been looking for signs that the labour market is cooling, and by extension taking some steam out of inflation, as it debates how long to keep interest rates elevated.

BMO chief economist Doug Porter said in a note to clients on Wednesday that while the rising unemployment rate suggests a slackening in the labour market, still-hot wage growth puts the Bank of Canada in a “tricky spot.”

“With productivity barely moving, these (five per cent) gains will feed right into costs and threaten to keep inflation sticky,” he wrote.

Inflation has also surprised economists with softer than expected reports for two months in a row, most recently cooling to 2.8 per cent annually in February. Real gross domestic product data has meanwhile come in hotter than anticipated to start 2024, suggesting the economy is holding up under the weight of higher interest rates.

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But economists weighing in on Friday said that the weak job report, which noted a tick down in total hours worked for March, could be a sign that Canada’s economy is set for a more pronounced slowdown.

TD Bank senior economist James Orlando said in a note that the March jobs report “casts a cloud over the Canadian economy.”

To date, the Bank of Canada’s decision to be patient on its pivot to rate cuts has been validated by relatively strong economic results, he said, giving the central bank “extra time” to ensure inflation cools back to its two per cent target. But a weak jobs report might challenge that approach.

“This throws some cold water on expectations that the recent string of hot economic data prints to start 2024 will be sustained,” he wrote.

CIBC senior economist Andrew Grantham said in a note Friday that the “cracks that had been emerging within the Canadian labour market suddenly got a lot wider.”

While strong GDP data had pushed markets to expect policy rate cuts from the Bank of Canada to begin in July, Grantham said the weaker than expected jobs report should affirm CIBC’s call for a decrease in June.

Porter also said that a June rate cut is “looking a bit more likely now.” He said that the Bank of Canada could sound more “dovish” – opening the door to rate cuts in the future – at its April 10 decision.

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Money markets raised their odds for a June rate cut after Friday’s jobs release, according to Reuters, and expect the central bank will hold at its decision next week. The Bank of Canada will also release fresh forecasts for inflation and the economy alongside the rate announcement on Wednesday.

Grantham said the expected economic softening in the second quarter of the year will continue to drive up the unemployment rate, which he expects to peak close to 6.5 per cent.

“However, interest rate cuts starting in June should bring a reacceleration in growth, which will help to stabilise the labour market in the second half of the year and into 2025.”

– with files from The Canadian Press and Reuters