Economists, analyst say trends in wage growth and employment hint at end to central bank's hiking cycle
The Canadian employment numbers from October released this morning could be the sign Bank of Canada officials needed to fully let go of its policy-tightening stance, according to several analyses.
This morning, Statistics Canada revealed net employment rose by 17,500 last month, short of the consensus 25,000 expectation leading up to the report. Unemployment, meanwhile, took a 0.2-percentage point uptick to reach 5.7%, the highest it’s been since the reopening of the Canadian economy.
“The details were generally on the soft side,” wrote Douglas Porter, CFA, chief economist and managing director, BMO Economics in a flash reaction to the report.
“In days of yore (i.e., maybe five years ago), a monthly rise of 17,500 would be about normal, and would certainly have been enough to keep the unemployment rate steady,” Porter said. “But with Canada's population growing at breakneck speed—the labour force is now growing at well over 50,000 people per month—such a job gain is simply not enough.”
Teasing apart the threads, Simon Harvey, head of FX Analysis at Monex Europe and Canada, was unsurprised at Canada’s lagging labour demand relative to population growth last month, “given the economy is essentially flatlining and is, in our view, on the precipice of a mild recession.”
Teasing apart the threads, both Porter and Harvey underscored full-time jobs contracted last month, with full-time employment contracting by around 3,300. Job gains were mostly seen in part-time roles, Harvey noted.
Both maintained that with the re-emergence of slack in the jobs market, wage gains are starting to ease.
“The broader softening in the job market is only slowly chipping away at wage pressures, a key focus for the Bank of Canada,” Porter said. “Average hourly wages eased to a 4.8% y/y pace from 5.0% in the prior month, but is only slightly below the average gain in the prior year (also 5.0%).”
“Wages for permanent employees rose 0.1% month-over-month (m/m), and fell to 5% year-over-year (y/y),” Tiffany Wilding, economist at PIMCO Canada, said separately. “This will be welcome news for Bank of Canada (BOC) officials, who were concerned that a significant reacceleration in wage inflation over the summer was preventing a further normalization in inflation.”
With wage inflation starting to flag, Harvey said, Canada’s central bank should be close to ending its policy-tightening campaign.
“[The decline in wage growth] should preclude a continued decline in the BoC’s measures of core inflation, which if confirmed would support our view that the BoC is now concluded with its hiking cycle and will now rely on below potential growth in guiding inflation back to target,” he said.
“We think this report adds to other recent indicators of a softening economy and still too high but better inflationary trends that can keep the BOC on hold for now, and looking to cut before the Fed,” said Wilding.
From Porter’s perspective, the wage growth picture is likely to develop into a more meaningful slowdown, giving Tiff Macklem all the more reason to stay on the sidelines, though Porter believes “rate relief remains a distant prospect.”
Harvey predicted the BoC is unlikely to ease before Q2 next year, though it could be forced to pull its policy lever back down to neutral “if growth conditions crater and lead to a more substantive unwind in the labour market, thus weighing on wage growth and the consumption outlook for 2024.”
