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Here’s what economists are saying about the latest jobs report and what it means for interest rates
Posted Jan 6, 2023 • 6 min read
15 comments Canada added 104,000 jobs in the month of December. Photo by Winnipeg Sun
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December’s blockbuster jobs report pointed to continued strength in the labor market and indicated the Bank of Canada is likely to raise interest rates again when policymakers meet later this month, economists said.
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Canada added 104,000 jobs in December, Statistics Canada reported Jan. 6, beating analysts’ expectations for a modest 5,000 additional positions and pushing the unemployment rate to five percent from 5.1 percent.
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“The increase was supported by a 90,000 increase in the labor force, mainly among younger people,” Stephen Brown, Canada economist at Capital Economics, said in a note.
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The rest of the gains were among Canadians aged 55 and over, RBC Economics’ Carrie Freestone noted in a quick analysis of the hit.
Those gains consisted mostly of full-time positions in a variety of sectors, including construction, which added 35,000 jobs; transportation and warehousing, 29,000 jobs; information, culture and recreation, 25,000 jobs; and professional services, 23,000 jobs. Positions fell in educational services, wholesale and retail trade, and the health care sector, which alone lost 17,000 positions. Manufacturing lost 8,000 jobs. Meanwhile, employment in the hospitality sector remains 10 percent below its pre-pandemic level, Freestone said.
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Average hourly wages fell to 5.1% in December from 5.6% in November, encouraging data for the Bank of Canada as it seeks to cool inflation, Brown said.
Another strong area noted by economists was the increase in the participation rate to 65 percent from 64.8 percent.
The December jobs report takes into account the holiday hiring season and does not skew the numbers, “a common misconception,” Charles Saint-Arnaud, chief economist at Alberta Central, in an email.
“The data is seasonally adjusted, meaning it takes into account seasonal patterns such as hiring during the holiday period or early summer for summer jobs. Given the data adjusted for such trends, this means that employment gains in December were stronger than usual for the month,” he said.
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The Bank of Canada raised interest rates by 400 basis points last year, bringing them to 4.25% from 0.25% in March. Markets have priced in another rate hike in January, with cuts expected in late 2023.
Here’s what economists are saying about the latest jobs report and what it means for the Bank of Canada and interest rates:
Stephen Brown, Capital Economics
We still think the bank will fall to a 25bp hike later this month, but the robustness of the labor market is a clear risk to our view that the bank will stop after that. At the very least, the bank seems likely to accompany its next policy decision with guidance that suggests markets have already gone too far in pricing in a rate cut for later this year and beyond.
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Douglas Porter, BMO Economics
While it’s always dangerous to read too much into a single Canadian jobs report, it can be concluded that the economy was still in a serious slump at the end of last year. It’s true that the labor market is usually the last to turn around when conditions soften significantly, but there’s absolutely no hint of such softening in the jobs data.
At the very least, today’s solid results support the view that Canada’s central bank will raise rates again later this month. We call for a 25 basis point hike to 4.5 percent and then a move to the sidelines for a reassessment. Suffice it to say that with wages still hovering around five percent and the unemployment rate holding at five percent, the risk is heavily tilted towards the need for the Bank to eventually do more to quell underlying inflationary pressures .
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Carrie Freestone, RBC Economics
Labor markets are still extremely tight. Nearly six percent of jobs in Canada are vacant, but the number of unemployed people available is very low. The lagged impact of the Bank of Canada’s 400 basis point rate hike in 2022 will dampen hiring demand in 2023 and begin to push up unemployment – although the current vacancy glut and worker shortage will limit layoffs in the short term. The Bank of Canada is likely still nearing the end of the current rate hike cycle, although very strong labor market momentum through the end of 2022 increases the odds that the Bank of Canada will follow through with another rate hike later this year month.
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Interest rates rose after Canadian job gains beat expectations
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Sticky inflation data probably doesn’t sit well with the Bank of Canada
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Charles St-Arnaud, Alberta Central
A healthy labor market is a challenge for the Bank of Canada. As we have explained many times, the BoC needs to slow growth and create some spare capacity in the economy to fight inflation. This is likely to lead to higher unemployment and job losses. That being said, some slack in the labor market would be a welcome outcome for the BoC.
Continued resilience in the labor market is likely to tip the BoC in favor of tightening monetary policy by 25 basis points at the January 25 meeting. However, whether the BoC will hike further is likely to depend on inflation with the next release on January 17. Nevertheless, some strong signs of moderation in underlying inflationary pressures may be needed for the BoC to keep rates unchanged.
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James Orlando, TD Economics
2022 was a landmark year for the Canadian labor market. The economy added 381,000 jobs, while the unemployment rate remained just around the historic low of 4.9 percent set in the spring. That helped wages rise by more than five percent year-on-year in the last half of the year, spurring more people to enter the workforce. Today’s impressive report speaks to that power. Employment growth and labor force growth make this an incredibly positive print. The fact that most of the gains are full-time positions in the private sector and span many industries further supports the robustness of today’s numbers.
Today’s report reinforced expectations that the Bank of Canada will continue to raise its key interest rate at its meeting in late January. Although the Bank of Canada has signaled it could go either way with its next policy decision, continued strength in employment means the bank isn’t done yet.
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Andrew Grantham, CIBC Economics
The Canadian labor market remains much stronger than expected and (so far) apparently resilient to rapidly rising interest rates. While the strong hiring at least partly reflects companies needing to make up for increased absenteeism, the drop in the unemployment rate near our record low leads us to forecast a final 25 basis point hike from the Bank of Canada at its meeting later this day month.
Marc Desormeaux, Desjardins Economics
Another month, more job instability in Canada. December’s jump in employment, an increase in participation and a drop in the unemployment rate removed some of the weakness seen in previous months. But the results were not strong everywhere.
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A larger reduction in hours worked, at least in part due to worker absenteeism due to illness, paints a picture of an economy that requires more workers to produce the same amount of goods and services. A further slowdown in steady employee wage gains also suggests some easing of inflationary pressures, although they remain too high for the Bank of Canada’s comfort.
The employment footprint does not change our tracking of real GDP growth, which is currently roughly 1.5 percent (quarter-on-quarter) for the fourth quarter of last year. This stays good…
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