Canada’s jobless rate ticked higher to 5.2% in May, marking the first increase since August 2022 as economists have been watching for any sign of a softening labour market.
Statistics Canada reported Friday a weaker summer hiring season for youth drove Canada’s unemployment rate higher, while overall employment was little changed last month as the economy lost a modest 17,000 jobs.
“Today’s negative print ends a streak of eight months of job gains,” said TD director of economics, James Orlando in a client note.
“The question is now: Is this a one-off or the start of a trend? The labour market had been defying gravity for months and was bound for some giveback.”
The job report comes two days after the Bank of Canada raised its key interest rate by a quarter of a percentage point, bringing it to 4.75%, the highest it’s been since 2001.
The decision was prompted by a string of hot economic data, including a surprisingly resilient labour market. The central bank said the strength of the Canadian economy suggests getting inflation back to 2% may be harder than it had previously expected.
Canada’s unemployment rate was previously hovering at 5% for five consecutive months, just above the all-time low of 4.9% reached last summer.
But economists reacting to Friday’s report say the Bank of Canada will need more than one relatively weaker job report to back off of rate hikes. In fact, many of them are expecting the central bank to move ahead with another rate hike in July.
“If 425 basis points was not enough to slow things down, is another 25 basis points going to be the straw that breaks the camel’s back? That’s kind of hard to believe,” said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist.
Earlier this year, the central bank paused its aggressive rate-hiking cycle that began in March 2022. The Bank of Canada was hoping its rapid monetary policy tightening would be enough to stifle inflation.
But the economy has proven to be more resilient this year than it had expected. Employers have continued to hire, consumers are spending more and the economy is growing.
Reitzes says the full effect of rate hikes have yet to filter through the economy, but even with that taken into account, the central bank is likely nervous that high inflation is pushing up inflation expectations among consumers and businesses.
“If you don’t act more forcefully to bring down growth in a more timely manner, you run the risk of having inflation expectations stay higher,” Reitzes said.
Although the job market hasn’t slowed enough for the central bank’s liking, Statistics Canada noted in its report that job growth has moderated in recent months. It says monthly job gains between February and April averaged at 33,000. That follows the economy adding more than 300,000 jobs cumulatively between September and January.
In May, fewer people were working in business, building and other support services as well as professional, scientific and technical services last month. Meanwhile, employment rose in manufacturing, other services and utilities.
The central bank has been particularly concerned about how fast wages are growing, arguing that wage growth in the 4% to 5% range is incompatible with a 2% inflation target.
The federal agency says wages were 5.1% higher in May compared with a year ago.