Canada’s labor market kicked off the new year with an impressive surge, adding 37,000 jobs in January, surpassing expectations and marking the largest gain in four months. The increase, fueled by a rise in part-time employment, contributed to a decline in the unemployment rate to 5.7%, the first drop since December 2022, according to Statistics Canada.
However, amidst the positive job market news, a noteworthy trend emerged—wage growth for permanent employees slowed to 5.3%, aligning with economists’ predictions and reflecting a decrease from the previous month’s 5.7%.
This data suggests a dynamic where the economy is still generating jobs, but the pace is being outpaced by population growth, primarily driven by robust immigration. The growing supply amid a cooling demand, influenced by high borrowing costs, seems to be contributing to a more significant economic slack, which, in turn, is influencing the moderation in wage growth—a crucial metric under the scrutiny of the central bank.
Policymakers now find themselves with more flexibility to contemplate interest rate cuts, possibly in the first half of the year. In January, Governor Tiff Macklem and his officials maintained policy rates at 5%, indicating a shift in discussions towards the duration of keeping borrowing costs at the current level.
Despite the elevated wage growth, policymakers interpret past gains as catching up with the cost of living. They view wage growth as a lagging indicator and anticipate a gradual moderation, attributing it to the labor market reaching “normal levels” of shortages and the economy having more supply than demand. Future adjustments in the labor market are expected to manifest through increases in unemployment.
The latest job report is crucial as it precedes the upcoming rate decision on March 6. Economists widely predict that policymakers will maintain policy rates at 5% for the fifth consecutive meeting, with expectations of the easing cycle to potentially commence between April and July.
Additional data reveals positive signs, with total hours worked in January increasing by 1.1% from a year ago and a 0.6% rise in the month. However, the participation rate experienced a slight decline to 65.3%, with a steeper drop among youth aged 15 to 24 compared to other age groups.
The employment gains were diversified across the services-producing sector, with notable increases in wholesale and retail trade, finance and real estate, and educational services. Meanwhile, declines were observed in accommodation and food services, professional and technical services, and health care and social assistance. Ontario, the most populous province, led the regional employment growth among ten provinces.
As Canada navigates its economic landscape, the intricate interplay between job gains, wage growth, and interest rate considerations becomes a focal point for policymakers and market observers alike.
