Headwinds from aggressive rate hikes yet to hit hiring
Published Mar 10, 2023 • Last updated 1 day ago • 5 minute read
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Canadian employers added about 22,000 jobs in February, and the jobless rate held steady at a near-record low of five per cent, Statistics Canada said on March 10. Photo by Joe Raedle/Getty Images Bank of Canada governor Tiff Macklem wants to stop raising interest rates, but the data isn’t co-operating.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Canadian employers added about 22,000 positions in February, and the jobless rate held steady at a near-record low of five per cent, Statistics Canada said on March 10.
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The employment number is considerably less impressive than the 150,000 jobs that Statistics Canada estimates were created in January, and the 69,200 new jobs the agency counted in December. And the February increase falls within the Labour Force Survey’s margin of error, so the gain isn’t big enough to state with confidence that hiring increased significantly last month.
But the central bank would welcome evidence that the labour market is losing momentum, not holding at a level that senior deputy governor Carolyn Rogers on March 9 described as “very tight,” which probably should be interpreted as too tight if policymakers are to make good on their mandate to keep inflation at two per cent.
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“Job gains in Canada have been surprisingly strong in recent months,” Rogers said in a speech in Winnipeg hosted by the Manitoba Chambers of Commerce. “With weak economic growth for the next couple of quarters, however, we expect that the tightness in the labour market will ease and, as it does, pressure on wages will come down.”
The outsized increases in hiring in December and January stand out because economic growth stalled in the fourth quarter. That indicator fits with what the Bank of Canada is trying to do. Macklem raised the benchmark interest rate to 4.5 per cent from 0.25 per cent between March 2021 and January 2022, an aggressive tightening of financial conditions meant to cool economic growth and crush inflation.
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Article content Some commentators assumed a recession was inevitable. But Canadian employers keep hiring, and it’s apparently a sellers’ market because wages are rising at a pace that hasn’t been seen in decades. The Bank of Canada isn’t against anyone getting a raise, but employers inevitably will seek to recoup the cost of a higher labour bill by raising prices for goods and services, and wealthier households — at least according to their payslips — will increase demand that suppliers are already struggling to meet. That makes getting inflation back to two per cent that much harder.
Statistics Canada said average hourly wages increased 5.4 per cent from February 2021, representing a re-acceleration of wage growth that had been tracking lower.
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Article content Rogers explicitly stated in her speech that wage increases at an annual rate of four per cent to five per cent is faster than Canada’s economy can handle because productivity is too weak to match supply to the demand that will come when incomes are increasing that fast. All things equal, the latest hiring numbers increase the odds that the Bank of Canada will have to resume increasing interest rates after pausing on March 8.
“The labour market in Canada remains robust and resilient,” Charles St-Arnaud, chief economist at Alberta Central, said in a note to clients. “A robust labour market and strong wage growth are a challenge for the Bank of Canada,” the former economist at the central bank added. “The BoC needs to slow growth and create some excess capacity in the economy to fight inflation. This will likely lead to a rise in the unemployment rate and job losses.”
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Article content Kevin Carmichael: 3 things Carolyn Rogers told us about how Bank of Canada is thinking about the economy Loonie will be factor when deciding whether interest rates stay on hold: Bank of Canada Bank of Canada holds interest rate steady but further hikes remain on the table There’s little sign of job losses, despite the headwinds created by the most aggressive series of rate increases in the Bank of Canada’s history. The Canadian dollar increased to 73 U.S. cents from 72 cents after the hiring data was released, partly because traders anticipate the Bank of Canada isn’t finished. Those traders might be right. Total hours worked increased 0.6 per from January, indicating economic growth might have picked up in the first quarter.
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“The chance of additional monetary policy tightening with an interest rate hike increased,” Arlene Kish, director of Canadian economics at S&P Global Inc.’s market research arm, said in a note to clients.
There is still a lot of time between now and the Bank of Canada’s next interest rate decision on April 12. Statistics Canada’s update of its consumer price index for February will be key, and there will be another release of the Labour Force Survey a few days before the central bank concludes its next round of policy deliberations. The federal government’s budget on March 28 could also factor into Macklem’s thinking, as he’ll have a better sense of the extent to which government spending will contribute to demand.
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Rogers told her audience in Winnipeg that current economic conditions broadly matched the Bank of Canada’s outlook at the start of the year, but policymakers nonetheless remain more worried about inflation getting out of hand than the economy crashing into a recession. That suggests the central bank will err on the side of raising interest rates if the data remain inconclusive.
Macklem can expect lots of conflicting perspectives from Bay Street, which is split on where the economy is headed. Independent economist David Rosenberg, who thinks central banks have raised interest rates too high, called the Canadian hiring data “undoubtedly strong,” but added that year-over-year growth is slowing and that much of the gain came in “cyclically insensitive” industries. “We don’t believe this report contains enough evidence to move the needle on the Bank of Canada’s ‘wait and see’ approach,” he said in a note.
Economists at Citigroup Global Markets Inc. read the report completely differently. Gisela Hoxha and Veronica Clark advised their clients to get ready for higher interest rates in April. The increase in wage growth suggests “labour demand continues to run well in excess of labour supply,” they said in a note. “This reinforces our base case of another (quarter-point) hike by the BoC in April with risks of further hikes.”
• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin