Canada's labor market is showing signs of strain as the unemployment rate climbed to 6.6% in August 2024, marking a seven-year high when excluding the pandemic years of 2020 and 2021. This development has prompted economists to advocate for more substantial rate cuts from the Bank of Canada to bolster the economy.
The latest data from Statistics Canada reveals that while the economy added a net 22,100 jobs in August, this growth was primarily driven by part-time employment. This figure fell short of analysts' expectations, who had forecast 25,000 new jobs for the month.
In response to the economic situation, the Bank of Canada recently reduced its key policy rate to 4.25%, marking its third consecutive rate cut. Governor Tiff Macklem has indicated that deeper rate cuts could be implemented if the economy requires additional support.
The unemployment rate has risen by 1.6 percentage points since January 2024, a trend that economists find concerning. The increase in joblessness has been particularly pronounced among youth aged 15 to 24, with this summer recording the highest unemployment rate for this demographic in eight years.
"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."
The labor market's performance is closely tied to Canada's overall economic health. As one of the world's largest economies by nominal GDP, Canada's economic indicators are closely watched by global markets. The country's highly educated workforce, with over 56% of adults having completed post-secondary education, is a key asset in its predominantly service-based economy.
However, the current economic landscape presents challenges. Economic growth has flattened out since June 2024, potentially falling short of the Bank of Canada's projected 2.8% growth for the third quarter. This sluggish growth, coupled with Canada's high population growth rate - one of the highest among G7 nations - has led to concerns about a potential recession.
The employment rate, which measures the proportion of working-age individuals with jobs, has declined in 10 out of the last 11 months, reaching 60.8% in August. This trend underscores the ongoing challenges in the labor market despite Canada's strong fundamentals, including its rich natural resources and position as a major global trader.
On a positive note, wage pressures appear to be easing. The average hourly wage growth for permanent employees slowed to an annual rate of 4.9% in August, down from 5.2% in July. This moderation in wage growth could help in managing inflationary pressures, aligning with the Bank of Canada's inflation target of 2%.
As Canada navigates these economic headwinds, the interplay between unemployment, interest rates, and overall economic growth will be crucial in shaping the country's economic trajectory in the coming months.