Canada - Slower job growth to keep Bank of Canada in cutting mode

Summary - Canadian employment growth was tepid last month and the employment rate continues to fall. With inflation below 2%, today’s jobs report does not change our view that the Bank of Canada will keep cutting its policy interest rate to 2.5-2.75% by mid next year.

Whether December is a 25 or 50-basis point cut is almost a coin flip. We’ve been leaning slightly towards 50, but we await another CPI, GDP, and jobs report before locking in that call.

The Details - Employment was little changed, rising 15,000 (+0.1%) in Canada last month following a 47,000 gain in September. The job slowdown points to an economy with plenty of slack in the labour market. Put another way, the economy is not growing fast enough to absorb still-rapid population and labour force growth.

The unemployment rate held steady in Canada at 6.5%, but that’s only because the participation rate (the share of the 15+ population looking for work or with jobs) fell again.

The employment rate (the share of Canadians 15+ with a job) dropped to 60.6%, its lowest rate since the pandemic in July 2021.

One thing that the Bank of Canada seems less concerned about these days is wages. Wage growth can be inflationary if not matched by productivity gains and labour productivity has been falling in Canada. Today’s jobs report shows that wage pressures remain sticky with average hourly wages up 4.9% year-over-year. While this may raise some eyebrows, we don’t think it’s enough for the Bank to change course given the weak economic and inflation backdrop.

Alberta - Largest monthly job gain since February

Summary - With the population booming, Alberta needs to add lots of jobs each month just to prevent the unemployment rate from rising. We see today’s job gain as a positive sign, especially the concentration of gains in the private sector and in construction (where activity has been strong) alongside the upward trend in oil and gas employment.

The Details - Alberta employment bounced back last month, rising 13.2K following a 7.6K decline in September and leading all provinces. Digging deeper, job gains were concentrated in the private sector (22.1K) and in full-time jobs (8.2K).

Last month, the goods-producing sector led the charge with a notable gain in construction (8.5K) and manufacturing (7.1K). Service employment was flat with declines in retail/wholesale trade and public administration offset by gains elsewhere.

We've been waiting for construction employment to gain traction given this year’s boom in home building. We suspect ongoing labour shortages are at play, holding back construction payrolls.

Another sector that has gained momentum is oil and gas (technically called forestry, fishing, mining, quarrying, oil and gas, but it’s mostly oil and gas in Alberta). Employment in this industry category is up 12.8% year-to-date. That’s still well below the 2014 peak (see the chart below), but employment has come back in a meaningful way—something highlighted in the Enserva State of the Industry Report released this week. The employment uptick corresponds to the oil production boom in the province, with TMX coming online earlier this year. This matters, as oil and gas is closely integrated with other industries and tends to drive gains in related service and manufacturing sectors.

Last month, the unemployment rate fell by 0.2 points to 7.3% as job gains outpaced labour force growth. Alberta’s labour market has been in an unusual place. While job growth has consistently outpaced the rest of Canada (see chart), its unemployment rate remains higher. That’s because of rapid population growth and entry into the labour force with employment struggling to keep pace.

Forecast implications - Our October forecast is largely on track. With only two months remaining in the calendar year, Alberta’s job growth so far this year is 3%—ahead of the national average of 1.7%, and very close to our forecast for 2024 of 2.9%. The unemployment rate has averaged 7% (vs. forecast of 7.1%).

The October forecast had the unemployment rate staying above 7% for the rest of the year, then averaging 6.8% next year, primarily due to a slowdown in labour force growth. But with even slower population growth expected next year than forecast in October in light of new federal targets, we now see potential for a 6.5% unemployment rate next year. Our next forecast comes out in December.

For the daily trivia question and answer, please see this week’s edition of The Seven.