Canada's unemployment rate fell to 5.7% in January

OTTAWA – The Bank of Canada is in no rush to cut interest rates after Statistics Canada reported stronger-than-expected employment growth last month, economists say.

The federal agency's labor force survey released Friday said the economy added 37,000 jobs in January after several months of relatively flat employment.

Canada's unemployment rate fell to 5.7 percent last month, the first drop since December 2022.

“I would classify the labor market as tighter than expected, but not necessarily stronger than expected,” said Andrew Grantham, executive director of economics at CIBC.

“Because, yes, employment continued to grow a little faster than consensus expected. But that really pales in comparison to the huge population growth.”

People aged 15 and over in Canada grew by 0.4 per cent between December and January, far outstripping the 0.2 per cent increase in employment.

The labor market cooled significantly in 2023 as higher interest rates weighed on consumer spending and business investment, pushing the unemployment rate up from 5.1 percent in April to 5.8 percent in December.

Brendon Bernard, senior economist at employment website Indeed, says the unemployment rate doesn't give the full picture of the state of the labor market. This is because it only measures the share of the unemployed among those actively looking for work.

Statistics Canada's report noted that the employment rate, which measures the share of the working-age population employed, fell for four consecutive months, including in January.

“I think it's probably a good barometer of the direction of the labor market,” Bernard said.

Even so, the relatively favorable state of the labor market suggests to economists that the central bank will take time when it comes to lowering interest rates.

“Today's data does not accelerate the Bank of Canada's timeline,” Grantham said.

The Canadian economy also looks set to end 2023 on a stronger-than-expected note.

Statistics Canada reported on Wednesday that the economy grew 0.2 per cent in November, marking the first expansion in six months.

According to preliminary estimates, real gross domestic product rose 1.2 percent year-on-year in the fourth quarter after a similar decline in the third quarter.

Last month, the Bank of Canada chose to hold its key interest rate at five percent, signaling that it is close to cutting rates.

However, Governor Tiff Macklem expressed concern about the stickiness of inflation and warned that the central bank is prepared to raise rates if price increases fail to cooperate.

CIBC did not change its forecast for the timing of the first rate cut, as it still expects the central bank to cut the key rate starting in June. But the bank now expects to cut rates less overall this year.

Employment rose in January across several sectors, including wholesale and retail trade, as well as finance, insurance, real estate, rental and leasing.

In addition, accommodation and food services showed the largest decline in employment.

Workers' wages continued to grow rapidly last month as Canadians sought compensation for past inflation. Average hourly wages, which have been growing steadily at an annual rate of four to five percent, rose 5.3 percent over the previous year.

Statistics Canada says wage growth has been stronger for women and higher earners. While men continued to earn more on average than women, women's average hourly wages rose 6.2 percent compared to men's 4.4 percent.

For workers in the top 25 percent of the wage distribution, their wages increased by 5.9 percent, while those in the bottom 25 percent increased by 4.6 percent.

Canada's labor market has been supported by strong population growth driven by permanent and temporary immigration.

Compared to last year, the economy was supplemented by 345 thousand jobs, the number of working population increased by one million people.

With the Bank of Canada holding its benchmark interest rate on hold, economists are predicting that unemployment will rise throughout this year.

This report by The Canadian Press was first published on February 9, 2024.