The unemployment rate in Canada rose to 6.1% in March as more individuals entered the job market and job growth stalled. This development solidifies expectations of a potential interest rate cut in June.
According to Statistics Canada’s labour force survey released on Friday, the jobless rate has increased from 5.8% in February to 6.1% in March. This marks the most significant monthly rise in the unemployment rate since the summer of 2022.
In March, the economy shed 2,200 net jobs, contributing to a rise in the unemployment rate to 6.1%.
Last month, employment remained largely unchanged, with the economy shedding 2,200 jobs, following modest increases over the previous months.
The March jobs report represents the final significant economic data that the Bank of Canada must consider before its next interest rate decision on Wednesday.
Investors will closely scrutinize any indications from the central bank regarding the timing of potential reductions to its key rate, currently set at five per cent.
Previously, economists had anticipated the first rate cut to occur in either June or July. However, current expectations are tilting more towards June.
“For the Bank of Canada, it will be another reason to view the very strong GDP numbers we’ve seen in early 2024 with a degree of skepticism,” he said.
Statistics Canada reported last week that real gross domestic product (GDP) increased by 0.6 per cent in January. Additionally, the agency indicated that it anticipated continued growth in February, with a preliminary estimate suggesting a gain of 0.4 per cent.
Canada’s most recent employment data stands in stark contrast to the job figures released on Friday in the United States, highlighting the divergence between the two economies. The U.S. economy continues to stand out as a global outlier.
In contrast, U.S. employers added a remarkable 303,000 workers to their payrolls in March, fueling optimism that the economy can combat inflation without slipping into a recession despite elevated interest rates.
Meanwhile, Canada’s increase in unemployment occurs as businesses grapple with high borrowing costs, and robust population growth continues to expand the country’s labor pool.
The unemployment rate has increased by one percentage point compared to the same time last year.
Statistics Canada attributes the rise in the jobless rate to an increase of 60,000 individuals actively seeking employment or temporarily laid off.
The total number of unemployed individuals in the country reached 1.3 million last month, marking an uptick of nearly 250,000 compared to the previous year.
Young people are particularly affected by the tightening labor market. Employment among those aged 15 to 24 decreased by 28,000 in March, with the jobless rate for this demographic climbing to 12.6%, its highest level since September 2016, excluding the pandemic years of 2020 and 2021.
Friday’s report reveals that job losses in March were primarily concentrated in the accommodation and food services sector, followed by wholesale and retail trade, as well as professional, scientific, and technical services.
On the other hand, employment saw an increase in four industries, with health care and social assistance leading the way.
Despite the softer conditions in the labor market, wage growth continued to accelerate, with average hourly wages rising by 5.1% annually.
While economists are preparing for potential rate cuts in the upcoming months, it’s anticipated that the job market will continue to face challenges for some time.
Bank of Canada Governor tells Members of Parliament, “We are getting closer” to cutting interest rates.
Tiff Macklem stated, “We do see renewed downward momentum in underlying inflation.”
Bank of Canada Governor Tiff Macklem informed Members of Parliament on Thursday that the central bank is nearing a decision to reduce interest rates, citing indications of decreasing and sustained inflation.
Macklem told the House of Commons finance committee, “We do see renewed downward momentum in underlying inflation. The message to Canadians is, we are getting closer. We are seeing what we need to see and we just need to be confident that it will be sustained.”
Macklem highlighted that economic growth has stagnated, leading to an oversupply of goods, while wage increases have stabilized and the labor market has moderated from previously overheated levels. These factors have contributed to the decline in prices.
“Our key indicators of inflation have all shown positive movement,” he added, citing data on “core inflation” which excludes volatile price swings such as food and energy prices.
“We have made significant progress in addressing inflation, and recent developments are promising.”
The next opportunity for the central bank to lower interest rates will be on June 5th.
Macklem’s optimistic outlook could potentially bring relief to homeowners and prospective buyers who have faced the challenge of purchasing or refinancing a home amidst interest rates at 20-year highs.
Macklem noted that the current policy rate of five per cent has been curbing demand for homes. However, the Bank of Canada anticipates a robust rebound in housing activity throughout the year, accompanied by some upward pressure on housing prices.
While acknowledging the challenges posed by higher rates on Canadians and certain sectors like real estate, Macklem emphasized the central bank’s reluctance to maintain monetary policy at such restrictive levels for an extended period.
Macklem cautioned that the Bank’s overnight rate is unlikely to revert to the levels seen during the height of the COVID pandemic, when it effectively hovered around zero, or even to the pre-pandemic levels, which stood at 1.75% throughout 2019.
Expressing concern, Macklem emphasized that borrowers should not anticipate a return to the historically low rates that characterized much of the post-global recession period from 2009 to 2021.
“Interest rates will not return to the emergency lows we experienced during COVID, and they are unlikely to even reach the levels seen before the pandemic,” he stated.
Additionally, Macklem cautioned that when the Bank does initiate rate reductions, it will likely follow a gradual trajectory.
“Canadians should not anticipate a rapid decrease in interest rates,” Macklem emphasized.
Macklem’s relatively optimistic stance on rates contrasts somewhat with the viewpoint of Jerome Powell, the chair of the U.S. Federal Reserve, which determines interest rates in the United States. The Fed chose to keep interest rates unchanged on Wednesday.
“Inflation remains too high,” Powell stated. “There is no guarantee of further progress in reducing it, and the future trajectory is uncertain.”
Prospective homebuyers find themselves in a state of uncertainty, and only the Bank of Canada has the power to alleviate their predicament.
Buyers are holding back on spending, and it appears that rate cuts are the only measure that will prompt them to act.
It’s Canada’s worst-kept economic secret.
Tens of thousands of prospective homebuyers are poised to make a purchase, but they’re waiting for one key event: a rate cut from the Bank of Canada.
Buyers are holding back for two main reasons: First, due to record unaffordability, lower rates are necessary for people to pass the government’s mortgage stress test, which requires borrowers to demonstrate they can manage payments at rates that are 200-plus basis points higher than the contract rate.
Lower mortgage rates help in this regard by reducing monthly payments and thus the percentage of income devoted to those payments. Every percentage point drop in average rates boosts buying power by over eight per cent, adding more than $50,000 to people’s maximum home-buying budgets based on Canada’s average home price.
Secondly, more buyers need to feel confident that it’s safe to re-enter the market. This is especially true for those who anticipate a recession and higher mortgage defaults, despite leading economic indicators showing improvement. It’s also relevant for investors who believe they might secure better deals if inflation rises, immigration is reduced, and new rental supply leads to a drop in rents.
There will always be a segment of homebuyers with these anxieties, and some of these risks are valid. However, rate cuts would significantly help alleviate these concerns.
Meanwhile, governmental home-building efforts are progressing as slowly as a Toronto traffic jam, with no significant payoff expected for several quarters. According to the latest CMHC data, we are constructing only half the homes needed to meet long-term demand.
Adding to the demand is the continuous increase in paychecks. Over the past 12 months since the pandemic began, average weekly earnings have risen by approximately 4.4 per cent. While it’s true that if the economy takes a downturn, job losses will likely increase, historical patterns suggest that such downturns are typically not prolonged, and job losses tend to affect renters more than homebuyers.
For these reasons, some buyers are acting preemptively, seizing opportunities while they perceive conditions to be favorable. Although the national inventory has increased to 4.22 months, the highest since March 2020, average home prices have risen for five consecutive months. While average prices can be deceptive due to changes in the types of homes purchased, they often serve as reliable leading indicators of more accurate benchmark prices.
Predicting home prices is akin to attempting to pin the tail on a donkey after consuming a two-four. Even our housing agency, central bank, and real estate firms struggle to forecast consistently with accuracy.
That being said, you don’t need to possess clairvoyant abilities to make some informed predictions about the near future:
Thanks to continuous immigration, household growth will continue to surge.
Core inflation is expected to continue easing, potentially allowing mortgage rates to decrease by the end of the year.
Due to high interest rates, limited new construction pre-sales, counterproductive municipal regulations, and elevated building costs, home supply will likely continue to lag behind household growth.
Incomes are projected to continue rising above inflation.
Robust stock markets and corporate profits could sustain wealth effects, bolstering the bank accounts of prospective buyers or their family benefactors.
Counterpoints suggest that:
Defaults may continue to increase, despite being 46 per cent below the long-run average. Unemployment may continue to rise, although it affects homebuyers less than renters. Lower rates may prompt more home sellers to enter the market. Re-inflation remains a risk to mortgage rates. However, despite these challenges, the bulls could ultimately prevail in this market. They may continue to be motivated by Canada’s persistent supply-demand imbalance, declining mortgage rates, and a strong belief in the resilience of Canadian real estate. If this proves to be true, most markets may not see significant discounts in home prices, if any at all.
