Canada's jobless rate hits 3-year high to 6.6%, sparking calls for larger rate cuts

Sept. 6, 2024, 5:10 p.m.

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Canada’s unemployment rate edged up to 6.6% in August, scaling past a seven-year peak excluding the pandemic years of 2020 and 2021, data showed on Friday, prompting economists to call for larger rate cuts from the central bank.

The Bank of Canada reduced its key interest rate this week by 25 basis points to 4.25%. This marks the third consecutive rate cut, and Governor Tiff Macklem has stated that further reductions could occur if the economy requires additional support.

Advertisement The economy gained 22,100 jobs in August, marking an improvement from last month's decline. However, this growth was entirely driven by part-time employment, according to Statistics Canada. Analysts surveyed by Reuters had anticipated a jobless rate of 6.5% and a net job increase of 25,000 in August.

“We continue to see a significant chance that central bankers will need to lower the policy rate in October by 50bps to avoid falling behind the curve,” Royce Mendes, head of macro strategy at Desjardins Group, wrote in a report.

He noted, however, that additional data between now and the next monetary policy decision in October would help solidify the likelihood of a larger cut.

Financial markets trimmed their expectations of a rate cut in October to 93% from 98% before Friday’s announcement. Traders are fully pricing in two 25 basis point rates cut by December, with a small minority also factoring in a jumbo 50 basis point cut next month.

The Canadian dollar declined by 0.13%, reaching C$1.3520 against the U.S. dollar, or equivalent to 73.96 U.S. cents. The yield on the two-year government bond decreased by a basis point, settling at 3.272% at 1330 GMT.

Canada’s unemployment rate has risen by 1.6 percentage points since January 2023, which some economists have called alarming and pressed for deeper rate cuts to prop up growth.

The increase in unemployment was most prominent among young adults aged 15 to 24 on a year-over-year basis, and the rate of joblessness among this age group during the summer was the highest in eight years.

Advertisement Macklem noted during his remarks this week that sluggish employment growth is one of the factors that could potentially moderate robust GDP growth projections for the third quarter. Economic expansion flattened in June and is likely to remain stagnant in July. At this pace, it could fall short of the 2.8% growth projected by the BoC for the third quarter, economists have indicated.

“This report highlights the steady build-up of slack in the Canadian economy and specifically in the labor market,” Doug Porter, chief economist at BMO Capital Markets said.

“Odds of a 50 bp (basis point) rate cut are building,” he said.

Advertisement Since the GDP growth has been slower than the population growth in Canada, unemployment has increased steadily, fueling concerns of an economic downturn. The employment rate, which represents the proportion of employed individuals within the working-age population of 15 years and older, has been continuously declining and reached 60.8% in August, according to Statscan. This rate has decreased in 10 out of the past 11 months.

The average hourly wage growth for permanent employees slowed down to an annual rate of 4.9% in August, compared to 5.2% in July, according to the statistics agency. This wage growth figure, which has partly contributed to keeping inflation elevated, is closely monitored by the BoC.

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