The Canadian economy continues to defy gravity, at least from the view of headline data. Statistics Canada (Stat Can) released its latest Labor Force Survey (LFS) showing the unemployment rate fell in January. Experts warn it doesn’t tell the whole story, but it may be enough to drive expectations. If Canada continues to produce such positive headline data, analysts see something that was thought unthinkable until last week—further interest rate hikes.
Canadian Unemployment Falls For The First Time Since 2022
Canada’s economy has been outperforming expectations and employment was not an exception. The unemployment rate dropped 0.1 points to 5.7% in January. It was the first decline for the rate since December 2022, which shouldn’t surprise with GDP data coming in much higher than expected. However, some economists are warning the headlines are better than the data.
“…the headline figures mask weakness in the details. For the second month running, job gains were all part-time and mostly in the public sector, while more discouraged job hunters left the labor force,” explains Tony Stillo, a Director at Oxford Economics.
More Working Aged Canadians Are Being Excluded From The Data
The participation rate highlights Stillo’s point regarding discouraged workers. The rate measures the share of the workforce that’s ready, willing, able, and employed or actively seeking work. It fell 0.2% to 65.3% in January, and has fallen 0.4 points from last year. That’s nearly 500k more people excluded from the unemployment rate.
Participation rates aren’t just discouraged workers, they include people that can’t work for various reasons. It can be due to school, family care, retirement, illness, disability, traveling, volunteering, etc.. Virtually any reason that presents a commitment that could impede on one’s ability to search for work, preventing that person from being considered unemployed.
Great for positive data. Canada’s population is growing much faster than the country is creating jobs, but a large portion of that growth are international students. Despite the country repeatedly citing these students as filling an essential part of the workforce, if they can’t actually find a job—tough luck. They aren’t considered unemployed officially.
Canada’s Positive Headline Data May Drive Rates Higher
The latest employment data revealed a stronger-than-expected economy. While there are caveats with those numbers, they simply aren’t a driving factor when it comes to policy. Stillo’s team sees the positive data as more of an exception than something he expects to continue in the near-term.
“Today’s job report suggests a firmer economy to start 2024, but we continue to expect the labour market will weaken in H1 as hiring falters and layoffs mount as households cut spending during a deepening recession,” he explains.
Despite those students not counted as unemployed, post graduation they will be. Stillo sees this contributing further to the unemployment rate, pushing it towards the 7.5% range later this year.
A Canadian recession that blows up the job market and leads to rate cuts has become virtually a consensus at this point. That might not be the case if positive headline data continues to drive the narrative though. Stillo believes continued outperformance may actually drive a completely different outcome.
“However, in contrast to our baseline recession forecast, our modeling of a soft-landing scenario as expected by the BoC would result in continued labour market strength, higher inflation and likely prompt it to resume hiking, potentially lifting the policy rate to 5.5% by mid-year,” he warns.
More bluntly put, the negative outcome is still a certainty. How the country gets there is the mystery.
