Third month in a row that employment has declined
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Canada’s economy shed an unexpected, outsized number of jobs in August for the third consecutive month, another indication that growth is slowing as the Bank of Canada attempts to deliver a soft landing while wrestling exceptionally high inflation down to more normal levels.
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The country lost 40,000 jobs last month while the unemployment rate rose to 5.4 per cent, Statistics Canada reported on Sept. 9.
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August’s headline numbers quashed higher expectations from economists, who predicted the labour market would add 15,000 positions and the unemployment rate would tick up from 4.9 per cent in July to five per cent.
The consecutive losses over the past three months amount to 114,000, marking the first period in the pandemic of declines unrelated to lockdowns and restrictions. It’s also a phenomenon that historically does not occur outside of a recession, Desjardins head of macro strategy Royce Mendes noted.
“While revisions can always change the picture down the road, the deterioration in the job market appears to be occurring faster than anticipated,” Mendes wrote in a client note.
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Here’s what you need to know:
The declines
The job losses were mostly concentrated in the public sector, particularly education, which lost 50,000 jobs. Some of those drops in schools and educational institutions could reverse when data for September comes out, reflecting the back-to-school season. The public sector has borne the brunt of the jobs decline over the summer, losing 79,000 positions of the 114,000 overall in the past three months. But, it could be overstating broader weakness since it reflects a reversal in the hiring surge during the pandemic, Stephen Brown, senior economist at Capital Economics, said in a note.
Economists pinned the previous declines in June and July on growing retirements and job seasonality, but those arguments “are no longer as convincing,” Brown wrote.
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Though half the industries Statistics Canada tracks posted gains in August, construction shed 28,000 jobs, following the Bank of Canada’s rare 100-basis-point hike the previous month. It was a notable drop, highlighting the sector’s relationship with the central bank’s efforts to curb demand amid high inflation.
Higher interest rates cooled housing markets almost immediately and building permits declined in July, showing just how sensitive Canada’s real estate sector is to the central bank’s moves. “Higher interest rates mean projects get canceled as developers cannot secure financing and buyers hold back,” Tu Nguyen, economist at accounting and consultancy firm RSM Canada, said.
The increases
The rise in the unemployment rate was the first in seven months and the first that didn’t coincide with pandemic lockdowns or restrictions. In June, the unemployment rate dropped below five per cent to 4.9 per cent, the lowest rate on record, and held steady in July, despite job losses. Employment declines and labour force growth, up by 66,000, contributed to the half-percentage-point increase, which is still in a range that some economists deem as full employment — that is, anyone who wants a job either has it or can get it.
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Despite a rise in the unemployment rate, which would naturally lead to a decrease in pay, average hourly wages were up 5.4 per cent last month from August 2021 compared to 5.2 per cent year over year in June and July. That should catch the eye of policymakers at the Bank of Canada, who are trying to prevent high inflation expectations from becoming entrenched in the economy. If people think prices will continue to rise, they will demand raises, which can lead to businesses increasing sticker prices — a cycle governor Tiff Macklem has said he is trying to curb.
The number of hours worked were also unchanged in August, adding to inflationary worries. “The longer term trend in wage growth confirms the impression that the job market remains very tight. Add in poor productivity growth and the combination of the two is disconcerting if the aim is to get the cost of living under control,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, wrote in a note.
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Bottom line
August’s data could fuel worries over the economy’s slowing growth and the possibility of a recession. Typically, it can take a few quarters before the effects of higher interest rates are felt throughout the economy, but the jobs report is another signal that it may be happening sooner than expected. Gross domestic product lost momentum in the second quarter, rising 3.3 per cent when policymakers expected four-per-cent growth and economists expected 4.4-per-cent growth, for example.
“There is no debating that conditions are cooling quickly, with the pullback in construction a clear indication that rate hikes are beginning to bite,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note.
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Governor Macklem and his deputies will be walking a fine line when the Governing Council issues its next rate decision. Inflation pulled back in July, but mainly due to receding energy prices, while prices of goods and services accelerated.
“That cooling fits neatly with the view that the Bank of Canada will further moderate the pace of hikes and may indeed be getting close to the peak (we see another 50 bps of total rate hikes from here). However, the steady upward grind in wage growth and the stability in overall hours worked suggest that the bank won’t back down anytime soon,” Porter said.
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Canada's economy loses 40,000 jobs; unemployment rate jumps to 5.4% - Financial Post
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