The Canadian labour market rebounded in April by adding a substantial number of new positions, setting up a hotly debated decision from the Bank of Canada on whether to start lowering interest rates in June.
The economy added about 90,000 jobs in April after a slight decline in March, Statistics Canada said Friday in a report. It was the strongest month of job creation since January, 2023, and handily beat analyst expectations of 20,000 positions added last month.
Despite those gains, the unemployment rate held steady at 6.1 per cent, because the country’s population is growing at a feverish pace. The jobless rate has risen by more than a percentage point since the summer of 2022.
Moreover, wage growth is slowing, an encouraging sign for the Bank of Canada in its battle against inflation.
The results suggest employers are able to add more staff, despite the financial pressures posed by higher interest rates, but that labour market conditions are generally weakening.
The question now is whether the Bank of Canada will begin to cut rates at the next opportunity, on June 5, or wait to see more evidence that inflation is slowing. After Friday’s report, investors trimmed their bets for a rate cut next month, viewing it as roughly a toss-up decision.
“Today’s showy headline jobs increase will give the Bank of Canada some pause, since it reinforces the point that the economy is clearly not rolling over,” Bank of Montreal chief economist Doug Porter said in a client note. “Still, the reality is that economic slack is still rising,” he added, pointing to a higher number of unemployed people.
In April, employers mostly added part-time positions, which rose by about 50,000. The private sector accounted for most of the employment growth, although there were strong gains in the public sector as well.
The total number of hours worked jumped by 0.8 per cent in April, suggesting an upturn in economic growth to start the second quarter.
Still, there are ample signs of a weakening economy. As of April, there were 1.3 million unemployed people in Canada, an increase of 256,000 or 23.7 per cent from a year earlier.
The recent trend is that companies aren’t hiring people at nearly the same pace as they’re entering the country. Over the past year, employment has risen by 1.9 per cent, but the population aged 15 and up has increased 3.3 per cent.
Alongside this influx of labour participants, wage growth is calming down. Average hourly wages grew at an annual pace of 4.7 per cent in April, down from 5.1 per cent in March.
The surprisingly strong hiring in April led to a readjustment of rate expectations. As of Friday afternoon, traders were pricing in a less than 50-per-cent chance that the Bank of Canada trims its policy rate by a quarter-point next month, according to Refinitiv Eikon data. In recent days, those odds were higher than 70 per cent.
Over a hiking cycle that began in early 2022, the Bank of Canada has raised its benchmark interest rate to 5 per cent – the highest level since 2001 – from pandemic lows of 0.25 per cent. The bank is using tighter monetary policies to slow demand in the economy and ultimately bring inflation back to its 2-per-cent target.
Higher rates are having wide-ranging effects on the economy, including more onerous debt-servicing costs for governments and households. Many homeowners are facing the prospect of sharply higher payments when they renew their mortgages in the coming years, the extent of which depends on the path of interest rates.
If the Bank of Canada cuts rates this summer, it will likely precede a move from the Federal Reserve. The U.S. economy is frequently posting strong results, and thus investors don’t expect the Fed to cut before November. This divergent path for interest rates would put downward pressure on the Canadian dollar – a helpful scenario for exporters, but adding to costs for imported goods.
Statscan will release its next inflation report on May 21, offering central bankers another key piece of data before the June decision. Annual Consumer Price Index growth has slowed to just under 3 per cent in recent months. Bank of Canada officials have said they’re encouraged by this progress, but want to ensure they don’t cut rates too early, which could cause prices to flare up again.
Many economists on Bay Street said Friday that they were leaning toward a June rate cut. Nathan Janzen, assistant chief economist at Royal Bank of Canada, falls into this camp, but said a cut was contingent on further evidence of waning price pressures in the next CPI report.
“Labour markets have softened enough to lower inflation risks going forward and justify a pivot to interest rate cuts from the Bank of Canada – but the bottom also still hasn’t fallen out in a way that is forcing the central bank to act urgently,” he said in a client note.
Matt Lundy