Canadian employment grew much faster than expected, raising questions as to whether the Bank of Canada is really done raising interest rates.
The economy added 150,000 jobs in January — 10 times the median estimate in a Bloomberg survey — while the unemployment rate held steady at 5%, near a record low, Statistics Canada reported Friday in Ottawa.
It was the fifth straight month of increases for a labor market that continues to defy all predictions of a coming slowdown, catching economists on the wrong foot. If anything, the demand for workers appears to be accelerating, buoyed by Prime Minister Justin Trudeau’s policy of opening the gates wider to new immigrants, international students and temporary workers from abroad. In December, economists were forecasting a small gain of 5,000 jobs; employers added almost 70,000.
The economy has created 326,000 jobs since September, pushing the number of employed Canadians to more than 20 million for the first time. “The labor market is sending precisely zero signs of economic stress,” Bank of Montreal Chief Economist Doug Porter said in a report to investors.
Bonds tumbled on the strong print. The benchmark two-year yield soared as high as 4.13% — a three-month high — while the loonie rallied to C$1.3362 per US dollar at 9:56 a.m. Ottawa time.
Friday’s numbers suggest Canada’s tight labor market is still running at an unsustainably hot pace. The December figure, along with other stronger-than-expected data, prompted a potentially final interest-rate hike by the central bank last month before policymakers declared a pause while they assess the state of the economy.
Governor Tiff Macklem, who raised the overnight lending rate by 425 basis points to 4.5% in less than a year, has said he expects the lagged effects of higher rates to drag economic growth to close to zero in the first three quarters of 2023. At its last meeting, the central bank said it now plans to hold, but could hike further if enough evidence of a hotter-than-expected economy accumulates.
“While Canadian central bankers emphasized they would need an ‘accumulation of evidence’ that the economy was not following the path laid out in their projections, today’s data is a big piece of evidence that it is not,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a report to investors.
Strong jobs data increase the chances the Bank of Canada will be forced from the sidelines to deliver another quarter-percentage-point increase. Traders in swaps markets put the odds of another 25-basis-point hike at around three quarters by summer, from less than half before the release. Rate cuts are no longer expected this year.
“We have to imagine that this sort of data surprise clears the ‘high bar’ needed for additional tightening, but we still doubt the BoC will have enough evidence in hand to move rates in March,” Toronto-Dominion Bank strategist Andrew Kelvin and Robert Both said in a report to investors. “So we look to April, which at this point is definitely a live meeting, and we see max risk of rate hikes for June.”
Canada is enjoying rapid population growth because of immigration, and the survey data show that non-permanent residents — including students and temporary workers — are seeing outsized job gains. The labor force participation rate increased 0.3 percentage points to 65.7%, as the labor force grew by 153,000, or 0.7%.
The country followed the US in the unexpected surge in employment, defying recession forecasts in both economies. US nonfarm payrolls jumped 517,000 last month while the unemployment rate dropped to 3.4%, the lowest since May 1969, and average hourly earnings grew at steady clip.
In Canada, average hourly wages rose 4.5% in January, down from 4.8% in December, after months of persistent growth of more than 5%. Earlier this week, Macklem said wage growth running in the range of 4% and 5% isn’t consistent with getting inflation back to the 2% target unless productivity growth is surprisingly strong.
The blowout gains in January pushed the employment rate — the percentage of people aged 15 and older who are employed — to 62.5%, a level last observed in April and May 2019. Employment growth last month was driven by women and men in their prime working years, and in both private and public sectors.
In January, total hours worked rose 0.8% on a monthly basis, the fastest pace since May, and up 5.6% compared to a year earlier.Employment increased in five provinces, including Ontario, Quebec and Alberta, and was up in six industries, led by wholesale and retail trade.
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