Despite inflation and rising interest rates, the labor market continued to defy forecasts and to create jobs in March, which seriously complicates the task of the Bank of Canada.
As long as households have jobs, rising wages and accumulated savings, demand is very strong and this gives strength to the economy. And that generates jobs, explains Benoit Durocher, economist at Addenda Capital, who speaks of a “virtuous circle”.
“The economy is not in recession,” he sums up, pointing out that the increase in wages is roughly equal to or greater than the rate of inflation, which maintains household purchasing power.
In March, the unemployment rate remained unchanged at 5% in Canada and increased slightly in Quebec, from 4.1% to 4.2%, Statistics Canada said Thursday.
New jobs added at a slower pace in Canada and Quebec lost jobs for the second month in a row.
There are obvious signs of weakness in Quebec that there are not in Ontario and the rest of Canada.Hélène Bégin, economist at Desjardins
“Quebec’s economy has been faltering since the middle of 2022,” she observes.
The past year ended strongly, with growth of 2.8% in the fourth quarter, but it was only due to payments from the Quebec government that caused consumption to rebound, she said.
Desjardins still predicts that Quebec will suffer a moderate recession in the second half of the year, which will be reflected with some lag in the job market.
The Canadian economy added 34,700 jobs in March, which further surprised economists, who expected far less. Although new jobs are concentrated in services and in one sector in particular, transportation and warehousing, the labor market is showing surprising strength in the first quarter of 2023.
Year-to-date, the economy has added more than 200,000 jobs, most of which, 93%, were full-time jobs. All the provinces have a positive balance sheet, including Quebec, which lost jobs in February and March.
The average hourly wage increased again in March, by 5.2%, an annual rate slightly lower than the 5.4% of the previous month. However, such increases are incompatible with a rapid return of inflation to the Bank of Canada’s 2% target.
There are more people working today than before the pandemic, but that doesn’t stop businesses from having trouble finding the workforce they need to meet growing demand.
Since the start of the year, the number of people aged 15 and over has increased by 204,000 in Canada, fueling economic growth.
That momentum continues, according to economists at Desjardins, who forecast GDP growth of 3% in the first quarter. This is infinitely more than what the Bank of Canada had forecast in January, or 0.5%.
The March employment snapshot is the last before the Bank of Canada’s interest rate announcement on April 12. The resilience of the labor market complicates the task of the central bank, which is banking on a slowdown to calm an overheating economy and reduce inflation.
Solid economic growth, a resilient job market and rising wages argue in favor of a rate hike.
Other factors militate on the contrary for maintaining the key rate at the current rate of 4.5%, according to economists at the National Bank. Average hourly earnings are moderating, businesses are less worried about labor shortages and inflation is falling, list Matthieu Arseneau and Alexandra Ducharme in their commentary. “Rate hikes have been very aggressive and will continue to weigh on the economy due to transmission lags,” they said.
The economy is still overheating, but most economists expect the Bank of Canada to extend the pause announced in January. It could, however, give a clear signal that it is ready to resume raising rates, while the markets are still expecting a cut in the key rate before the end of the year.