Canada's June labour market data was weaker than most analysts expected, showing a net loss of 1,400 jobs. (Steve Russell/Toronto Star via Getty Images) (Steve Russell via Getty Images)
National Bank of Canada economists have warned that Canada's unemployment rate is on track to reach or exceed 7 per cent this year unless the Bank of Canada (BoC) cuts interest rates “soon.”
Taylor Schleich, director of economic strategy at National Bank of America Financial Markets, said in a note Monday that the labor market is “breathing” and shouldn't be ignored in favor of just focusing on inflation.
“We would say a July rate cut is the more likely outcome, with the Bank of Canada only likely to come to the sidelines if the June CPI report is dismal.”
Schleich said May's inflation rate “wasn't ideal, but I don't think it's wise to miss the forest for the trees when it comes to signs of unemployment,” adding that “inflation has been much more stable than it has been recently.”
“If recent (deteriorating) labor market trends continue, the unemployment rate will likely exceed 7 percent this year.”
The Bank of Canada cut interest rates for the first time in more than four years in June, taking its benchmark rate to 4.75%. Its next rate announcement is on July 24, but markets are divided on whether further cuts will be forthcoming.
Canada's June labour market data was weaker than most analysts expected, showing a net loss of 1,400 jobs, and the unemployment rate rose two percentage points to 6.4%. The rate has been gradually rising since falling to a post-pandemic low of below 5% in 2022, outpacing that of many peer countries. “The 1.6% increase from the trough in 2022 is the largest among the G7 and fifth-best in the OECD,” Schleich noted.
Economists generally agree that the unemployment rate at which inflation should theoretically stabilize (known as the non-accelerating inflation rate of unemployment, or NAIRU) is around 6% Mr. Schleich said in an email to Yahoo Finance Canada.
“So we're already at that level, or maybe just above it, but we're rising pretty quickly,” he said. “Given that monetary policy has a time lag” — that is, interest rate changes tend not to have an immediate effect on employment data — “we would argue that the Bank of Canada needs to cut rates relatively quickly to stabilize before the employment data gets too high.”
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The National Bank's report said its forecasts, which extend the three- and six-month average trends of rising unemployment, show the rate could reach 7.5 percent next spring, which it hopes will be addressed by cutting interest rates.
Some economists have pointed to still-strong wage growth as a reason for the Bank of Canada to delay policy, but Schleich noted that wage growth is typically a lagging indicator.
“Slower wage growth is bound to happen over time as labor market conditions soften. There's no reason to pay ever higher wages while more and more workers are on the sidelines.”
John MacFarlane is a senior reporter for Yahoo Finance Canada. Follow him on Twitter. FollowDownload the Yahoo Finance app, available for Apple and Android.