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Decline in Canadian Unemployment Rate Signals Potential for Additional Interest Rate Increases

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In a recent turn of events that could shift economic forecasts, the Canadian economy has been showing signs of resilience, particularly in the job market. The latest Labor Force Survey (LFS) from Statistics Canada (Stat Can) has revealed a decrease in the unemployment rate for January, a piece of news that has stirred the financial waters of Canada. While on the surface, this may appear as a sign of economic strength, experts caution against taking this data at face value. Nonetheless, this development could potentially set the stage for further interest rate hikes in the near future.

Canadian Unemployment Falls For The First Time Since 2022

Against the backdrop of surpassing GDP expectations, Canada’s unemployment rate saw a marginal decline of 0.1 points, settling at 5.7% in January. This marks the first decrease in the unemployment rate since December 2022, hinting at underlying economic momentum. However, not all economists are ready to celebrate this as an unqualified success.

Tony Stillo, Director at Oxford Economics, points out a concerning trend behind the headline numbers. According to Stillo, the recent job gains have predominantly been in part-time positions and within the public sector. Moreover, there has been a notable increase in discouraged job seekers exiting the workforce, which nuances the otherwise positive news.

More Working Aged Canadians Are Being Excluded From The Data

The labor force participation rate further emphasizes the issue raised by Stillo. Dropping 0.2% to 65.3% in January, and showing a 0.4 point decrease from the previous year, the participation rate suggests that nearly half a million people are now excluded from the unemployment statistics. This category not only includes discouraged workers but also individuals unable to work for a variety of reasons, such as education commitments, family care, or retirement.

This decrease in participation rate is particularly striking given Canada’s rapid population growth, outpacing job creation. A significant portion of this growth comes from international students, who, despite being considered a vital part of the workforce, are not included in unemployment figures if they are unable to secure employment.

Canada’s Positive Headline Data May Drive Rates Higher

The recent employment data suggests a robust start to 2024 for the Canadian economy. Despite the complexities within the data, such positive indicators are influential in policy-making decisions. Stillo’s analysis anticipates potential weaknesses in the labor market during the first half of the year, with expectations of increased layoffs and reduced hiring as households cut back on spending amid a deepening recession.

However, Stillo also presents an alternative scenario diverging from the baseline recession forecast. Should the economy continue to outperform, it might avoid the anticipated downturn, leading to sustained labor market strength and higher inflation. Such conditions could prompt the Bank of Canada (BoC) to resume interest rate hikes, possibly increasing the policy rate to 5.5% by mid-year.

In conclusion, while the drop in Canada’s unemployment rate offers a glimmer of optimism, the underlying details suggest a more complex economic landscape. The potential for further rate hikes remains contingent on the continuation of such positive headline data, setting up a delicate balance for policymakers navigating through uncertain economic waters.

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