Kevin Carmichael: Jobs surge signals higher interest rates for longer — and hikes still on the table
The Bank of Canada wants to see a weaker labour market, but so far it's not happening
Canada’s employers defied recession talk for yet another month in April by adding to their payrolls, keeping the jobless rate near a record low, Statistics Canada reported May 5. There were some faint signs that hiring could be peaking, but for now, the strength in the labour market will keep additional interest rate increases on the table at the Bank of Canada. Here’s what you need to know:
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- Employment rose by about 41,000 positions in April, a significant enough increase to satisfy Statistics Canada’s margin of error, leaving no doubt that the labour market continued to expand last month.
- The unemployment rate was five per cent for the fifth consecutive month, near a record low and a level that many economists associate with “full employment,” a theoretical condition where everyone who wants a job can get one.
- All the hiring gains were in part-time work, as full-time positions were essentially unchanged from March. Retailers, companies involved in transportation and warehousing, and Statistics Canada’s “information, culture and recreation” category led the gains.
- Most of the new jobs were created in Ontario. Prince Edward Island also posted a gain, while Manitoba lost about 4,000 jobs. Hiring in all the other provinces was little changed.
- Average hourly wages increased 5.2 per cent from April 2022, a rate of growth that is significantly stronger than Canada’s pre-pandemic trend.
What’s the key number?
Wages. Before the pandemic, wage gains were essentially stagnant, trundling along at the pace of inflation — two per cent or less. That was then. Wages have now increased to a range of around four per cent to five per cent for about a year. That’s a positive, considering the cost of living was increasing even faster for much of that period. But wages are now increasing faster than inflation. That will ease anxiety in many households, but it will complicate matters for the Bank of Canada, which sees the current pace of wage increases as inflationary.
Governor Tiff Macklem told an audience in Toronto on May 4 that he’s worried inflation could get stuck at a rate of around three per cent, which would force him to either raise interest rates or leave them higher for longer. Faster wage growth is one of the factors that would keep upward pressure on prices by contributing to demand that already exceeds the economy’s ability to keep up with orders.
What does it mean for interest rates?
All things equal, a stronger labour market means stronger demand. Macklem reiterated at that event in Toronto that the Bank of Canada thinks the economy is still in a period of “excess demand,” meaning households and businesses are seeking to purchase more goods and services than the economy can supply. That puts upward pressure on prices, which is why the central bank is bent on slowing the economy with higher interest rates.
It is good news that the labour market remains strong after the most aggressive series of interest rate increases in the Bank of Canada’s history and the worst outbreak of inflation since the early 1980s. A year ago, many forecasters assumed the economy was headed for a recession, led by a spike in unemployment. That hasn’t happened, suggesting the central bank may have nailed a “soft landing.”
But inflation is still too high. The Bank of Canada stopped raising interest rates in March and paused again in April. “We’re looking for that sweet spot,” Macklem said on May 4. He may have found it, but he’ll probably need to see the unemployment rate rise a little to be convinced of that. The latest hiring numbers suggest interest rates will stay higher for longer, and increases remain a possibility.
“There are some things we need to see happen that we haven’t seen yet,” Macklem said. “If those things don’t fall into place, we are going to have a problem.”
A weaker labour market is one of those things.
• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin
