REAL ECONOMY BLOG | August 04, 2023

Even though the number of jobs overall in Canada was little changed as the economy lost 6,000 positions in July, the labour market is showing signs of losing momentum.

Canada’s unemployment rate rose to 5.5%, the third consecutive increase for the first time since March 2020, the onset of the pandemic, according to government data released Friday. This trend is solid evidence of cooling labour demand.

At the same time, inflation pressures remain stubborn as hourly wages grew by 5.0%, higher than the current inflation rate of 2.8%. This resulted in a gain in real wages and more purchasing power for Canadian households.

Data like this that paints a mixed picture is expected through the end of the year as the Canadian economy muddles through the dual challenges of high interest rates and high inflation.

On average, the economy gained 22,000 jobs per month this year, but the bulk of that gain occurred in January.

Nonetheless, the most recent figures might offer enough reassurance for the Bank of Canada to hold its policy rate steady through the end of the year.

Services continued to drive the economy

The labour force participation rate decreased to 65.6% as the population grew while employment remained steady.

The services-producing sector continued to carry the economy, adding 21,200 jobs, nearly offsetting the reduction of 27,500 jobs in the goods-producing sector.

Canadians continued to travel and eat out, adding 8,400 jobs in accommodation and food services in July.

The trend of employment growth in accommodation and food services since early 2021 is indicative of a permanent shift in consumer behavior, since the pandemic, with households preferring to spend on experiences over goods.

But the decline of 15,800 jobs in information, culture and recreation offers evidence that households might soon have to cut back on spending overall as their savings wind down.

Unsurprisingly, the largest gains were concentrated in industries that are not sensitive to interest rates and are often seen as recession-proof such as health care, which had a gain of 25,100 jobs, and education, which added 18,800 positions.

While the health care worker shortage won’t go away anytime soon, provincial governments around the country have made strides in hiring, reducing vacancies by 8.5%.

Construction took the biggest hit, losing 44,700 jobs, and accounted for the entire decrease in the goods-producing sector. While real estate activity is still hot, the construction boom might be over in a high interest rate environment.

The takeaway

Resilience has been the word to describe the Canadian economy this year, even as the Bank of Canada has steadily increased interest rates. Now, the impact of that tightening monetary policy is beginning to be seen in the job market.

While the Bank of Canada will reevaluate the situation as new data emerges, July’s job report might warrant a pause on rate hikes as the economy works through the dual challenges of high inflation and high interest rates.

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