To see why rate cuts are coming in Canada, look no further than the March job report. The unemployment rate reached 6.1%, surpassing 6% for the first time in over two years, according to Statistics Canada on Friday.
While Canada has added more than 300,000 jobs over the past year, including a loss of 2,200 in March, the working-age population has grown by more than a million, resulting in an inevitable rise in the unemployment rate.
But this data needs to be interpreted in the context that Canada has had the fastest population growth since 1957 through immigration, and that not all new immigrants find work right away.
That said, immigrants are overwhelmingly of working age, which in the long run adds invaluable fuel to the otherwise shrinking labour supply as Canadians retire.
We expect the Bank of Canada to hold rates steady in April and begin cutting in June as it waits for another couple of months of easing inflation to solidify the progress already made.
Waiting any longer would mean repeating the mistake made in 2022, when the central bank waited too long and stifled the recovery.
The reality is that employers are squeezed by high interest rates. The Bank of Canada’s most recent Business Outlook Survey showed that businesses have little intention of hiring until rates drop, likely in the second half of the year.
Those workers who have jobs can stay put as layoff numbers have been modest, but the lure of outsized wage gains made by switching jobs seen in the post-pandemic talent shortage is no longer there.
Those who have been laid off are having a harder time finding work.
Read more of RSM Canada’s insights on the economy and the middle market.
The environment is especially challenging for those entering the labour force for the first time. Youth unemployment rose to 12.6%, the highest since 2016 and 3.1 percentage points higher than a year earlier. As a result, many younger people are deciding to stay out of the labour force altogether.
The services-producing sector posted job declines in March after the boom that followed the pandemic.
The largest loss was in accommodation and food services, which fell by 27,000 jobs. That sector is now 118,000 jobs below the pre-pandemic level of February 2020.
Trade lost 23,100 jobs, and information, culture, and recreation lost 10,000. Since these industries tend to employ youths, young workers are disproportionately impacted.
Professional services had a drop of 19,900, underscoring the recent trend of an industry pulling back because of lower demand after years of expansion.
The two industries with the most gains were the ones with the most pressing labour shortages: health care, rising by 39,900 jobs; and construction, up by 15,300.
These gains align with the recent announcement from the federal government to limit temporary workers except for those in health care and construction.
The takeaway
March’s job report adds to evidence that suggests imminent rate cuts by the central bank: lower labour demand, lower inflation excluding mortgage interest rates, shelter returning to target, and a flatlining economy.
Activity in the job market will resume only in the second half of the year after rate cuts begin.
