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Canada’s job growth is challenging basic economic theory. Are the models wrong?



Canada’s economy added a stunning 150,000 jobs last month. It’s the second straight month that jobs numbers blew well past expectations. And it’s yet one more data point that challenges the narrative that Canada needs to shed jobs to bring inflation under control.

“We’re seeing a key test of our theories of how labour market tightness translates to wages and from wages to prices,” said Brendon Bernard, chief economist at the job search site Indeed.

Economic theory tells us that unemployment and inflation are inextricably linked. As unemployment falls and more people work, inflation increases. And as unemployment increases, inflation drops.

But that’s not what’s happening here. Inflation peaked in June at 8.1 per cent. It has decelerated considerably since then. In December, it had fallen to 6.3 per cent and is expected to fall all the way to 5.6 per cent when we get January’s numbers later this month.


“Theories are always being tested,” said Bernard. “But I think in really unique times like this, that’s even more the case. Partially because the pressure is really on. There are major policy implications of how things evolve in the next six months or a year.”

The policy implications of this are enormous.

‘Must make them at least a tad nervous’

Canadians are already squeezed — pinched between rising prices and increased borrowing costs. The Bank of Canada raised rates by another 25 basis points earlier this year. But it also signaled it was ready to pause rate hikes going forward.

“If economic developments evolve broadly in line with the [bank’s] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” wrote the central bank in its last decision.

Canada has now added 326,000 jobs since the beginning of September. That was certainly not in line with the Bank of Canada’s outlook.

“For the Bank of Canada, the strong [jobs] report must make them at least a tad nervous about their freshly-minted pause — we said the bar for any move would be very high, but the employment gain is pretty towering indeed,” wrote BMO Capital Markets chief economist Douglas Porter in a research note.

But economists like Jim Stanford say continuing to hike rates now is unnecessary and needlessly painful.

He’s been saying for months that inflation was driven by global factors like the price of oil and shipping. He says it’s been exacerbated at home by corporations hiking prices more than their input costs.

“We’ve been barking up the wrong tree on both the cause of inflation and how to fix it,” said Stanford, an economist and director at the Centre for Future Work.

Canada adds 100,000 jobs in December, exceeds expectations

The Canadian economy added 100,000 jobs in December, exceeding expectations and signaling to the Bank of Canada that another interest rate hike might be necessary.

He says most conventional thinking around inflation is that prices are driven up by too much spending. So, the orthodox response is to cool the labour market and put people out of work.

The problem, according to Stanford, is that in this particular environment, inflation is not following the textbook model.

“I think the assumption that you can’t have low unemployment without blowing the roof off inflation is being proved wrong day by day,” Stanford told CBC News.

‘No easy way to restore price stability’

The orthodoxy around the relationship between jobs and inflation isn’t the only theory being challenged right now.

Conservative Leader Pierre Poilievre has attacked the credibility of the Bank of Canada, saying it didn’t recognize the perils of inflation as it ramped up last year and has been too focused on supporting markets instead of regular Canadians.

Bank of Canada governor Tiff Macklem gave a speech this week entitled “How monetary policy works.” In that address, he tried to make a case for how the bank has seen the last year or so unfold.

“We know that the monetary policy tightening we’ve undertaken is hard on many Canadians. Unfortunately, there is no easy way to restore price stability. Monetary policy doesn’t work as quickly or painlessly as everyone would like, but it works,” said Macklem.

Communication and transparency are key to making sure Canadians understand and trust what the bank is doing. After a critical report from the International Monetary Fund last year, the Bank of Canada agreed to release more information around how it makes its decisions.

This week the bank unveiled its first ever Summary of Deliberations. It didn’t offer any surprises, but it is a clear attempt by the central bank to become more transparent.

A weird time for the economy

All this speaks to a uniquely weird time in both the Canadian and the global economies.

An unprecedented pandemic crashed into the economy just three years ago. Overnight it shocked markets and supply chains. It fundamentally changed how we live and work.


Now as life slowly creaks back to normal, economists say it can’t be much of a surprise that the old models and economic theories aren’t exactly spot-on.

The jobs report is just one data point and the Bank of Canada has more to consider before its next interest rate decision on March 8. Chief among those will be the next inflation report on Feb 21.

On the upside, there are an awful lot of positive forces at play right now. Inflation is decelerating, the economy has slowed, but hasn’t slipped into a recession, and experts say that red-hot jobs market should act as something of a buffer against a pretty lousy forecast for the first half of this year.


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Economy grew 0.5 per cent in January, Statistics Canada reports –



OTTAWA — Economic growth resumed in January and came in better than first expected following a small contraction in December, Statistics Canada said Friday.

Real gross domestic product rose 0.5 per cent to start the year, the agency said, beating its initial estimate for a gain of 0.3 per cent for the month and reversing a contraction of 0.1 per cent in the final month of 2022. 

Statistics Canada also said its initial estimate for February indicates growth continued with a gain of 0.3 per cent, though it cautioned the figure will be updated.


“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views,” BMO chief economist Douglas Porter wrote in a report.

“Even if growth stalls in March, it now looks like Q1 will post growth of 2.5 per cent, up from a flat read in Q4. While we continue to look for a notable cooldown in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to 1.0 per cent.”

The growth in January came as goods-producing industries gained 0.4 per cent for the month, while services-producing industries rose 0.6 per cent.

Statistics Canada said many of the main drivers for growth in January also contributed the most to the decline in December.

The wholesale trade, transportation and warehousing, and mining, quarrying and oil and gas extraction sectors all rebounded after falling in the previous month.

Wholesale trade gained 1.8 per cent in January, helped by wholesalers of machinery, equipment and supplies, while the mining, quarrying and oil and gas extraction sector grew 1.1 per cent after falling 3.3 per cent in December.

The transportation and warehousing sector added 1.9 per cent in January, more than offsetting a drop of 1.1 per cent in December that was due in part to bad weather.

This report by The Canadian Press was first published March 31, 2023.

The Canadian Press

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Canada's economy shows surprising resilience despite rate hikes – BNN Bloomberg



Canada’s economy kept growing at the start of this year, defying expectations of a stall and eventual technical recession in the face of the highest interest rates in 15 years.

Preliminary data suggest gross domestic product expanded 0.3 per cent in February, Statistics Canada reported Friday in Ottawa, led higher by oil and gas, manufacturing, and finance and insurance sectors. That followed a 0.5 per cent expansion in the previous month, stronger than expectations for 0.4 per cent growth in a Bloomberg survey.

The Canadian economy is now on track to expand at an annualized rate of 2.8 per cent in the first quarter, assuming growth in March comes in flat. That’s much more robust than the 0.5 per cent annualized pace forecast by the Bank of Canada in January, when it signaled a conditional rate pause. 


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“Today’s double-barreled blast of strength is well above even the most optimistic views,” Bank of Montreal Chief Economist Doug Porter said in a report to investors. “Suffice it to say that if the strength seen in the opening months of the year persists, the BoC is going to find itself in a tough spot.”

Canada’s currency reclaimed nearly all of its losses after the release and bonds rallied. The yield on benchmark government two-year debt fell more than 3 basis points to 3.777 per cent at 9:50 a.m. in Ottawa. 

The data suggest while some rate-sensitive sectors like housing have already cooled, overall economic growth is still holding up better than expected. It’s also at odds with a flurry of early estimates released last week that suggested a pullback in economic activity, with retail, wholesale and manufacturing sales all falling in February.

Friday’s numbers will test Governor Tiff Macklem and his officials as they look for evidence that monetary policy is sufficiently restrictive to bring inflation back to the central bank’s 2 per cent target. An accumulation of stronger-than-expected data may prompt them to stay on the sidelines for longer or even hike again.

Traders in overnight swaps markets, however, are betting the Bank of Canada’s next move will be a cut, given turmoil in global financial markets after the failure of regional U.S. lenders and a government brokered takeover of a European banking giant.

Economists in a monthly Bloomberg survey see 1 per cent annualized growth in the first three months of this year. But that’s expected to be followed by two straight quarterly contractions.

During deliberations for the central bank’s March 8 decision to hold rates steady for the first time in nine meetings, policymakers said they saw “clear signals” hikes so far were curbing demand. But there are few signs in recent data that the economy is gearing down.

Both goods-producing and services-producing industries were up in January, with nearly all sectors posting increases, except agriculture, utilities and management of companies.

Rebounds in several industries drove the January gain. Many of the key growth drivers were the largest contributors to December’s 0.1 per cent decline, including wholesale, transportation, and oil and gas industries. Accommodation and food services activity was also a key contributor.

“The Bank of Canada is likely at a crucial juncture and facing a significant dilemma,” Charles St-Arnaud, chief economist at Credit Union Central Alberta Ltd., said in a report to investors. “The central bank may have to choose between fighting inflation and hiking interest rates again or focusing on financial stability and keeping rates on hold.”

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UK economy avoids recession but businesses still wary



LONDON, March 31 (Reuters) – Britain’s economy avoided a recession as it grew in the final months of 2022, according to official data which showed a boost to households’ finances from state energy bill subsidies but falling investment by businesses.

With the economy still hobbled by high inflation and worries about a weak growth outlook, gross domestic product (GDP) increased by 0.1% between October and December after a preliminary estimate of no growth.

GDP in the third quarter was also revised to show a 0.1% contraction, a smaller fall than initially thought, the Office for National Statistics (ONS) said on Friday.

Two consecutive quarters of contraction would have represented a recession.


Despite the improvement, British economic output remained 0.6% below its level of late 2019, the only G7 economy not to have recovered from the COVID-19 pandemic.



“The latest release takes the UK a little further away from the recessionary danger zone although the report does not change the overall picture that the economy’s performance was lacklustre over the second half of 2022 as the cost of living crisis hit hard,” Investec economist Philip Shaw said.

The International Monetary Fund forecast in January that Britain would be the only Group of Seven major advanced economy to shrink in 2023, in large part because of an inflation rate that remains above 10%.

Since then, a string of economic data has come in stronger than expected by analysts.

Ruth Gregory at Capital Economics said Friday’s figures showed high inflation had taken a slightly smaller toll than previously thought.

“But with around two-thirds of the drag on real activity from higher rates yet to be felt, we still think the economy will slip into a recession this year,” she said.

House prices slid in March at the fastest annual rate since the financial crisis, mortgage lender Nationwide said.

The Bank of England (BoE) last week raised interest rates for the 11th consecutive meeting and investors are split on the possibility of another increase in May.

Britain’s dominant services sector rose by 0.1%, boosted by a nearly 11% jump for travel agents, echoing other data which has pointed to a surge in demand for holidays.

Manufacturing grew by 0.5%, driven by the often erratic pharmaceutical sector, and construction grew by 1.3%.

Individuals’ savings were boosted by the government’s energy bill support scheme and households’ disposable income increased by 1.3% after four consecutive quarters of negative growth.

The BoE expects Britain’s economy to have contracted by 0.1% in the first three months of 2023 but it forecasts slight growth in the second quarter.

The outlook has improved thanks in large part to falling international energy prices and a strong jobs market.

But the picture could darken again if recent turmoil in the global banking sector leads to lenders reining in loans.


The data suggested businesses remained cautious. Business investment fell 0.2% in quarterly terms, a sharp downgrade from a first estimate of a 4.8% rise after changes to the way the ONS calculates seasonal adjustments.

Earlier on Friday, a survey painted a more upbeat picture for businesses.

Finance minister Jeremy Hunt this month announced new tax incentives to encourage companies to invest, although they were less generous than a previous scheme and came just as corporate tax is due to jump.

The ONS said Britain posted a shortfall in its current account in the fourth quarter of 2.5 billion pounds ($3.1 billion), or 0.4% of GDP.

Excluding volatile swings in precious metals, the shortfall fell to 3.3% of GDP from 4.2% in the third quarter.

The ONS said increased foreign earnings by companies, particularly in the energy sector, helped narrow the deficit.

Britain’s financial account surplus – which shows how the current account deficit was funded – comprised large net inflows of short-term, “hot” money. Foreign direct investment was negative in net terms for a sixth quarter running.

($1 = 0.8073 pounds)

Additional reporting by William James, graphic by Vineet Sachdev; Editing by Robert Birsel and Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.



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