REAL ECONOMY BLOG | February 09, 2024

The Canadian economy refuses to go down without a fight.

Nearly two years into a cycle of steep interest rate increases and after half a year with the policy rate at 5%, the economy added 37,000 jobs in January, far exceeding expectations.

The unemployment rate fell for the first time in over a year to 5.7%, according to data released by Statistics Canada on Friday.

January’s strong jobs report proves the resilience of the economy. An April rate cut from the Bank of Canada would help solidify the odds of a soft landing.

Once again, all of the gains were in the services-producing sector, which added 60,400 jobs, offsetting a loss of 23,000 jobs in the goods-producing sector.

Major contributors to the gain were trade (31,000), finance and real estate (29,300) and educational services (27,700). The increase in real estate activity in January certainly helped.

In contrast, accommodation and food services lost 30,300 jobs, evidence of consumers cutting back discretionary spending on services like travel and dining out.

The labour force participation rate fell by 0.2 percentage points to 65.3% as the population 15 and older rose while the total number of people in the workforce stayed constant.

Average hourly wages grew by 5.3% on a year-over-year basis, a welcome drop from the previous month’s 5.4%. Nevertheless, wage growth has been above 5% for seven months, and that will give the Bank of Canada pause when it comes to rate cuts because high wage growth can prolong inflation.

As the year goes on, more union contracts will be up for renegotiations. If last year was any indication, union negotiations will keep wage growth elevated. But the more balanced job market of the current economy could limit unions’ collective bargaining power.

Those in the top quartile of incomes seemed little affected by the slowdown, and wage growth for this group reached 5.9%, far exceeding the rest. Wage growth for women reached 6.2%, higher than men’s at 4.4%.

Not all the signs were rosy in the report. The economy, for example, added 48,900 part-time jobs while shedding 11,600 full-time positions.

The job market is becoming more challenging for junior-level job seekers, evident by the rise in youth unemployment and part-time employment.

Youth employment rose by 1.1 percentage points on a yearly basis to 10.8%. Younger workers might have a harder time finding full-time employment, so they are turning to part-time work or gig work.

In addition, the labour force participation rate for female youths fell to the lowest level since 2000. For male youths, the rate also fell 2.9 percentage points from June to January. It is possible that some youths, both students and non-students, find the current job market too competitive and have dropped out for now.

New limits placed on international students and their spouses, which aim to slash their number by 35%, will restrict the labour supply and keep the unemployment rate low and wage growth higher than expected.

The takeaway

January’s job market shows a Canadian economy that is still showing resilience, even though the gains were mostly concentrated in part-time work. And while the stronger-than-expected report gives the Bank of Canada flexibility to wait until June for its first rate cut, an earlier move would be more beneficial for the economy.

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