(Bloomberg) — Canada’s unemployment rate jumped by more than expected, raising questions about whether the labor market is loosening at a pace that would justify larger interest rate cuts.
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The jobless rate rose 0.2 percentage points to 6.6% as a rapidly expanding pool of new workers were unable to find positions, Statistics Canada reported Friday. Outside the pandemic, that’s the highest since May 2017.
Economists had expected the unemployment rate to increase to 6.5%, and employment to grow by 25,000. While the country did add 22,100 positions in August — the first gain in three months — the details of the report were mostly weak.
The employment gains were driven by a net increase of 65,700 part-time positions. The number of full-time jobs fell 43,600. The country’s labor force rose 82,500 on the month, one of the larger increases in recent years.
“Despite an OK headline, the overall message from this report is that slack is building,” Doug Porter, chief economist at the Bank of Montreal, wrote to investors. That’s “very much keeping the Bank of Canada on an easing path, with a growing chance of a more forceful pace to those cuts.”
The data point to deteriorating labor demand in an economy that’s now consistently failing to add jobs at the pace of surging population growth. And while there’s little evidence of widespread layoffs, the continued weakness is likely to add to disinflationary pressures, allowing the Bank of Canada to keep lowering borrowing costs at a gradual pace.
Still, the unexpected jump in the jobless rate will further fuel debate about deeper interest rate cuts. Traders in overnight index swaps boosted bets that the Bank of Canada would cut by 50 basis points at its Oct. 23 meeting. They now put those odds at around 40%, compared with about 30% the day before.
Policymakers led by Governor Tiff Macklem reduced the policy rate by 25 basis points for a third straight time on Wednesday. Officials say they’re increasingly focused on downside worries, and are guarding against the risk that growth slows too much. Speaking to reporters, Macklem said governing council had discussed a scenario wherein the economy and inflation were weak enough to require a larger than quarter-point reduction in borrowing costs.
This is the first of two jobs reports before the October rate decision. The majority of economists in a Bloomberg survey expect the bank to cut by 25 basis points at each of the next four meetings, bringing the policy rate to 3% by mid-2025.
In the survey last month, economists also said they expected the share of unemployed persons as a proportion of the labor force to peak at 6.7% in the fourth quarter of this year — that’s just 0.1 percentage points above August’s jobless rate.
“The closer we get to 7%, the more pressure the Bank of Canada will feel to accelerate the pace of interest rate cuts,” said Andrew Grantham, economist at Canadian Imperial Bank of Commerce, though he stuck with his forecast of consecutive 25 basis-point cuts at the two remaining meetings this year.
The data were released at the same time as highly anticipated nonfarm payrolls in the US, which rose by 142,000 following downward revisions to the prior two months. Economists surveyed by Bloomberg were expecting an increase of 165,000. Treasury yields fell as markets weighed whether the weaker job gains would prompt a larger than quarter percentage point cut from the Federal Reserve at some point this year.
The Canadian dollar rose about 0.4% against the greenback, trading at C$1.3557 per US dollar as of 11:37 a.m. in Ottawa. The loonie fell against all other G-10 currencies. Canada’s two-year yield was 3.060%, down about eight basis points on the day.
Wage growth for permanent employees decelerated to 4.9% in August, slowing slightly less than the 4.8% rate anticipated by economists.
“We continue to see a significant chance that central bankers will need to lower the policy rate in October by 50 basis points to avoid falling behind the curve,” Royce Mendes, managing director of macro strategy at Desjardins Securities, said in a report to investors. He also said it was “too early” to change his official call.
Canada’s unemployment rate has risen from 5% at the start of last year.
The youth unemployment rate continued to surge in August, rising to 14.5%, the highest since 2012 outside the pandemic.
The participation rate increased 0.1 percentage points to 65.1%. The employment rate — the proportion of the working-age population that’s employed — fell 0.1 percentage points to 60.8% as the population aged 15 and over increased by 96,400.
Job gains were led by increases in education and health care, and job losses were led by decreases in miscellaneous services. Public-sector hiring and self-employment fell, while the private sector added 38,200 positions.
Regionally, employment rose in six provinces, with gains led by Quebec and Alberta, while the number of jobs fell in four provinces.
–With assistance from Randy Thanthong-Knight and Jay Zhao-Murray.
(Adds more details, economist reaction throughout.)
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