A jump in the unemployment rate puts the Bank of Canada in a ‘tough spot’. Here’s why – Global News Achi-News

Canada’s unemployment rate jumped up to 6.1 per cent in March amid rapid growth in the labor pool, Statistics Canada said Friday.

Canadian employers collectively lost 2,200 jobs last month but employment was little changed during the month, the agency said.

Canada’s unemployment rate was 5.8 percent in February.

The big increase in the unemployment rate – a full percentage point higher than it was a year ago – is linked to an additional 60,000 people looking for work or on temporary layoff in March, StatCan said. Last month the agency reported that, as of January 1, Canada’s annual population growth had reached its fastest rate since 1957.

The consensus of economists’ expectations called for 25,000 jobs gained last month and a more modest increase in the unemployment rate to 5.9 percent.

Young people aged 15-24 experienced the biggest contraction with 28,000 jobs being lost in March.

StatCan said the food and accommodation services, wholesale and retail trade, and professional, scientific and technical industries led to job losses during the month, offset by gains in health care and social assistance.

Average hourly wages were up 5.1 percent year over year, a slight acceleration from 5.0 percent in February.

The latest employment data comes days before the Bank of Canada’s next interest rate announcement, which is set for April 10.

The central bank has been looking for signs that the labor market is cooling, thereby taking some steam out of inflation, as it debates how long to keep interest rates high.

BMO chief economist Doug Porter said in a note to clients Wednesday that while the rising unemployment rate suggests a loosening in the labor market, still-hot wage growth puts the Bank of Canada in a “tough spot.”

“With productivity barely moving, these gains (five per cent) will feed straight into costs and threaten to keep inflation sticky,” he wrote.

Inflation has also surprised economists with softer-than-expected reports for two consecutive months, most recently cooling to 2.8 percent annually in February. Meanwhile real gross domestic product data has come in hotter than expected for early 2024, suggesting the economy is holding up under the pressure of higher interest rates.

But economists weighing in on Friday said the weak jobs report, which indicated a tick down in total hours worked for March, could be a sign that Canada’s economy is on the verge of a more pronounced slowdown.

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TD Bank senior economist James Orlando said in a note that the March jobs report “casts a cloud over the Canadian economy.”

So far, the Bank of Canada’s decision to be patient on its pivot to rate cuts has been validated by relatively strong economic results, he said, giving the central bank “extra time” to ensure inflation cools back to his target of two percent. But a weak jobs report could challenge that approach.

“This throws some cold water on expectations that the recent string of hot economic data prints into early 2024 will be sustained,” he wrote.

CIBC senior economist Andrew Grantham said in a note on Friday that the “cracks that had been emerging in the Canadian labor market have suddenly become much wider.”

While strong GDP data pushed markets to expect policy rate cuts from the Bank of Canada to begin in July, Grantham said the weaker-than-expected jobs report should confirm CIBC’s call for a cut in June.

Porter also said a June rate cut “looks a little more likely now.” He said the Bank of Canada could sound more “dofish” — opening the door to future rate cuts — in its April 10 decision.

Money markets raised their chances for a rate cut in June after Friday’s job release, according to Reuters, and they expect the central bank will hold off on its decision next week. The Bank of Canada will also release new forecasts for inflation and the economy alongside the rate announcement on Wednesday.

Grantham said the expected economic softening in the second quarter of the year will continue to raise the unemployment rate, which he expects to peak near 6.5 percent.

“However, interest rate cuts starting in June should bring a revival in growth, which will help stabilize the labor market in the second half of the year and into 2025.”

– with files from The Canadian Press and Reuters

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