The Canadian labour market faces a grim outlook, with unemployment projected to exceed seven percent this year if the Bank of Canada (BoC) doesn’t implement interest rate cuts soon, according to a recent warning from a National Bank economist.
The labour market is “gasping for air” and should not be overshadowed by the focus on inflation, Taylor Schleich, Director of Economics and Strategy at National Bank Financial Markets, emphasized in a note published on Monday.
“To us, a July cut should be considered a higher probability outcome, as only a disastrous June CPI report should leave the BoC sidelined,” Schleich stated.
While the May inflation report was not ideal, Schleich urged a broader perspective, noting that inflation has been more controlled recently compared to past trends. “Ignoring the worsening labour market signals could result in a seven percent or higher unemployment rate this year,” he cautioned.
Current Labour Market Trends
The BoC made its first interest rate cut in over four years in June, bringing the benchmark rate to 4.75 percent. The next rate announcement is scheduled for July 24, with market opinions divided on the likelihood of another cut.
June’s labour market data revealed a net loss of 1,400 jobs, pushing the unemployment rate to 6.4 percent, a 0.2 percentage point rise. This increase has been steadily climbing from a post-pandemic low of under five percent in 2022, outpacing many comparable countries. Schleich highlighted that the 1.6 percent rise since the 2022 trough is the largest in the G7 and the fifth highest in the OECD.
The Case for Interest Rate Cuts
Economists generally agree that the non-accelerating inflation rate of unemployment (NAIRU) is around six percent, a level where inflation remains stable. Schleich noted, “We are either at or slightly above this level and moving up quickly.” Given the lag in the impact of monetary policy changes, he argued that the BoC needs to act swiftly to stabilize employment figures before they escalate further.
National Bank’s projections indicate that if the current three- and six-month trends in unemployment continue, the rate could reach 7.5 percent by next spring. Interest rate cuts would be expected to counter this trend.
Despite some economists pointing to resilient wage growth as a reason for the BoC to delay cuts, Schleich noted that wage growth typically lags behind labour market conditions. “A slowdown in wage growth should follow the softening of labour market conditions eventually. There’s just no reason to be paying ever higher wages when more and more workers are on the sidelines,” he concluded.