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Canadian unemployment could exceed 7% if interest rates aren't cut soon: National Bank - YAHOO FINANCE

JULY 10, 2024

Labour market is 'gasping for air,' economist says

Canada’s unemployment rate is on a path to hit or exceed seven per cent this year if the Bank of Canada (BoC) doesn’t make interest rate cuts “sooner than later,” a National Bank economist warns.

The labour market is “gasping for air” and should not be ignored because of a fixation on inflation figures alone, National Bank Financial Markets director of economics and strategy Taylor Schleich wrote in a note published Monday.

“To us, a July cut should be considered a higher probability outcome, as only a disastrous June CPI report should leave the BoC sidelined.”

Although the May inflation print “wasn’t ideal, we don’t think it’s wise to miss the forest for the trees” as far as unemployment signals go, Schleich says, with “inflation much better behaved” than in the recent past.

“Left unabated, a seven per cent plus unemployment rate would be in store this year if recent (worsening) labour market dynamics persist.”

The Bank of Canada cut interest rates for the first time in more than four years in June, bringing its benchmark rate to 4.75 per cent. The next rate announcement is on July 24, but the market has been more or less split on whether another cut will happen.

Canada’s June labour market data came in weaker than what most analysts had projected, showing a net loss of 1,400 jobs, nudging the unemployment rate to 6.4 per cent, a 0.2 percentage point increase. That rate has been edging upwards since a post-pandemic low of under five per cent in 2022 — and at a pace exceeding that of many comparable countries. “The 1.6 per cent increase from the 2022 trough is the largest in the G7,” Schleich noted, and fifth in the OECD.

Economists generally agree that the unemployment rate where inflation should theoretically remain stable (known as the non-accelerating inflation rate of unemployment, or NAIRU) is around six per cent, Schleich writes in an email to Yahoo Finance Canada.

“So we’re there or slightly above that level but moving up pretty quickly,” he said. “Given that there are lags of monetary policy” — that is, interest rate changes don’t tend to have instant impact on employment figures — “we argue that the BoC needs to cut relatively quickly to stabilize those figures before they get too high.”

In the National Bank note, projections extending the three- and six-month average trends for unemployment increases show the rate hitting 7.5 per cent next spring — an outcome that interest rate cuts would be expected to counter.

Though some economists have pointed to still-resilient wage growth rates as a reason for the BoC to delay, Schleich notes that wage growth figures are typically a lagging indicator.

“A slowing in wage growth should follow from the softening in labour market conditions eventually. There’s just no reason to be paying ever higher wages when more and more workers are on the sidelines.”

John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.


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