Canada sheds jobs in July, unemployment ticks up to 5.5% as evidence of slowing economy mounts

The Canadian economy unexpectedly shed jobs in July while the unemployment rate ticked higher for the third straight month, providing further evidence that the economy is losing momentum in the face of higher interest rates.

The country lost a total of 6,400 jobs and the unemployment rate rose to 5.5 per cent from 5.4 per cent in June, Statistics Canada reported Friday. Bay Street analysts were expecting a gain of 21,100 jobs last month, according to Reuters polling.

The cooling labour market may take pressure off the Bank of Canada to raise interest rates again in September. However, the annual growth in average hourly wages – a data point closely watched by the central bank because of its connection with service-sector inflation – reaccelerated to 5 per cent in July compared to 4.2 per cent in June.

Job growth has been exceptionally strong through the first half of the year in defiance of the Bank of Canada, which is intentionally trying to weaken the labour market as part of its fight against inflation. Since January, monthly employment growth has averaged 22,000. This has started to wobble in recent months, with employment falling by 17,300 in May before rebounding by 60,000 in June.

“These ebbs and flows in the headline employment readings tend to occur around turning points,” Royce Mendes, head of macro strategy at Desjardins Capital Markets, wrote in a note to clients. “The simple fact that the economy has seen employment decline in two out of the past three months suggests that the Bank of Canada’s efforts to rebalance the labour market are working.”

The construction industry saw the biggest job losses last month, shedding 45,000 positions. There were also sizeable declines in public administration, culture and recreation, and transportation and warehousing. This was partially offset by gains in healthcare and social assistance, education, and the category that groups together finance, insurance, real estate, rental and leasing. Overall, losses were concentrated in part-time work.

Regionally, employment was up in Alberta, New Brunswick and Prince Edward Island, and down in Manitoba and Saskatchewan. There was little change in other provinces.

The downshift in the labour market comes at a time when the Canadian population is growing at a record pace due to high levels of immigration. Statscan noted that the employment rate for core-aged recent immigrants has fallen to 77.7 per cent from 80 per cent a year ago. In comparison, the employment rate for people born in Canada was 86.6 per cent, little changed from a year earlier.

“Slight monthly declines aren’t rare in the [Labour Force Survey], but they do stand out when the population is growing so quickly,” Brendon Bernard, senior economist at the Indeed Hiring Lab, said in an email.

“The drop-off in job opportunities is now starting to show up in the unemployment rate, likely impacting new entrants to the labour force, including recent immigrants, more than others. So far though, the weakness hasn’t been accompanied by a substantial rise in layoffs. As a result, the downshift in overall momentum has been relatively gradual,” Mr. Bernard said.

Employers in the United States also continued to slow the pace of hiring last month. The American economy added 187,000 jobs in July, the U.S. Labor Department reported on Friday. That was roughly in line with downwardly revised jobs numbers for June, but slower than the average monthly pace of job gains through the first half of the year.

After a year and a half of interest rate increases, both the Bank of Canada and the U.S. Federal Reserve appear to be nearing the end of their monetary policy tightening cycle. However, both central banks are wary of stopping too early and allowing inflation get stuck above their 2 per cent target.

Here, the strength of the labour market remains a crucial variable, as high levels of employment boost consumer spending and rapid wage growth adds to business costs, potentially feeding through into prices.

“The labour market remains tight, even if there are some signs of easing,” Bank of Canada Governor Tiff Macklem said last month, after increasing the bank’s benchmark interest rate to 5 per cent, the highest level since April 2001.

“The unemployment rate has increased slightly but remains historically low, and wage growth has been between 4 per cent and 5 per cent, higher than is consistent with price stability,” Mr. Macklem added.

Investors are betting that the Bank of Canada is done with rate increases. Interest rate swaps, which capture market expectations about monetary policy decisions, are pricing a 73 per cent chance that the bank will stay on hold at its Sept. 6 meeting, according to Refinitiv data.

Some economists, however, aren’t ruling out the possibility that the central bank will keep pushing borrowing costs higher.

“The reacceleration in wages and still low unemployment rate mean that today’s data are unlikely to convince the Bank of Canada that the labour market has loosened enough yet to sustainably achieve its 2 per cent CPI target, despite the weaker headline jobs count,” Canadian Imperial Bank of Canada senior economist Andrew Grantham wrote in a note to clients.

“Because of that we are, for now, retaining our forecast for one more interest rate hike, although some good news on the inflation front in two weeks time could be enough to prevent that.”

There are several key data releases before the Sept. 6 decision, including the Consumer Price Index numbers for July. The annual rate of CPI inflation fell to 2.8 per cent in June, but many economists expect it to tick back above 3 per cent over the summer as a result of less flattering year-over-year oil price comparisons.

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