Jobless numbers support further Bank of Canada rate cuts: economists

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The latest jobs data shows Canada’s unemployment rate continuing to rise, giving the Bank of Canada further ammunition to keep cutting interest rates, economists said.

Canada’s unemployment rate rose to 6.4 per cent in June from 6.2 per cent in May as the number of people looking for work increased while job creation remained “virtually unchanged,” with 1,400 fewer positions, Statistics Canada said, following Friday’s data release.

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Analysts had expected 25,000 positions to be added in June and a slight rise in the jobless rate, to 6.3 per cent, according to Bloomberg.

The report pointed to several signs of economic frailty, including a drop in total hours worked — down 0.4 per cent month over month — “a negative signal” for June gross domestic product, Andrew Grantham, an economist at CIBC Capital Markets, said in a note. Meanwhile, the number of unemployed people hired in June was lower than in the same month in the three years prior to the pandemic.

Here’s what the economists are saying about the latest jobs numbers and what they mean for the Bank of Canada and interest rates.

Recession questions: Desjardins Group

“The sharp rise in the unemployment rate will have many questioning whether Canada has entered a recession,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note, adding that the jobless rate has risen 1.6 percentage points from its “trough” of 4.8 per cent in July 2022.

The “recession” question will take time to answer, he said.

Still, it’s clear that hiring “stalled” in June, as the number of unemployed people rose to 1.4 million, up 3.1 per cent from May.

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Mendes said it’s “clear” that the Bank of Canada should cut at its next interest rate announcement and keep cutting at the September and October meetings.

“Lowering interest rates is the only way to soften the blow from upcoming mortgage renewals and keep any hope of a soft landing alive,” Mendes said.

‘Demand is softening’: Capital Economics

The chances have gone up that the Bank of Canada will cut in July, Olivia Cross, North America economist at Capital Economics, said in a note, as the latest labour force survey coupled with other slowing jobs data such as falling vacancies and slumping hiring intentions suggests “that demand is softening.”

June’s weaker-than-expected jobs report also bolsters Cross’s confidence “that the bank will cut at each remaining meeting this year.”

The one hitch in the numbers that could give the Bank of Canada pause was the increase in average hourly wages. Bank officials have cited rising wages as fuel for inflation.

Cross attributed that 5.4 per cent year over year increase to “unfavourable base effects.”

Rather, the three-month annualized rate fell to 3.3 per cent.

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That “will give the bank some comfort that wage growth will soon head in the right direction,” she said.

‘Comfort’ for central bank: CIBC Capital Markets

The June jobs report could take some of the sting out of the most recent consumer price index, which showed inflation accelerating, said CIBC’s Grantham.

“While core measures of inflation accelerated last month, the continued loosening of labour market conditions should give the Bank of Canada comfort that inflation will converge to its two per cent target over time,” Grantham said in a note.

The bank is sticking with its call for another 25-basis-point rate cut later this month, “although upcoming CPI data remain important,” he said.

Inflation data for June will be released on July 16.

‘Increases the odds’: Royal Bank of Canada

The bar is “lower” for the Bank of Canada to cut interest rates again based on the June jobs report, Nathan Janzen, assistant chief economist at Royal Bank of Canada, said.

While the drop in employment was small, Janzen said “under the surface” layoffs are rising and the drop in job openings “has shown no sign of ending.”

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Janzen also noted that the increase in the unemployment rate from its low in July 2022 is larger than those that have been seen in some ‘historical recessions.”

The Bank of Canada will still put weight on the upcoming inflation report and its Business Outlook Survey, which will provide insight into employers’ hiring intentions.

“But with interest rates still at restrictive levels, the bar to at least easing off the monetary policy brakes in the near-term is lower,” Janzen said. “The June labour market data increases the odds that the central bank will cut rates in July.”

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