TORONTO – Canada’s unemployment rate is at its highest level since 2017: last month it rose to 6.6% and economists say the malaise in the job market is worsening.
Layoffs are increasing and job offers are falling, as RBC deputy chief economist Nathan Janzen pointed out in a note to clients, as reported by the CBC in an extensive report on the topic (you can read it here).
But what happened? For more than two years, inflation has been the dominant feature of the economic landscape, and the Bank of Canada has taken extraordinary measures to try to keep price growth in check, raising interest rates in an attempt to slow the economy. Now, inflation is firmly within the Bank of Canada’s preferred window of 1 to 3%, a whisker away from the central bank’s target of 2%. The problem is that the economy has continued to weaken: GDP per capita has been negative in seven of the last eight quarters, and the latest monthly data shows that the momentum from earlier in the year is waning. So now Canada’s central bank is in something of a race against time: hopefully, interest rate cuts can work their way through the economy before Canada slips into a recession. It typically takes about eighteen months for changes in interest rates to fully make their way into the economy. The last interest rate increase occurred in July 2023, so we have not yet fully absorbed the economic impact of the rate increase. The central bank has cut three times this year. It is the first time since the 2009 financial crisis that the central bank has cut rates three times in a row.
Economists expect the bank to lower interest rates in October and again in December. For now, we expect the Bank to cut rates to 3.5% by January, and then to 3% by next June, but risks hang that the Bank of Canada will go faster than that, and potentially even further, as BMO Chief Economist Douglas Porter wrote in a note to clients. The question is whether these cuts will work fast enough to avoid a recession. Canada’s central bank doesn’t have much time, says RSM economist Tu Nguyen: it waited too long to start cutting and now needs to cut steadily over the next year to keep the economy out of recession.
Royce Mendes, managing director of Desjardins Capital Markets, says consumers have been squeezed for years by a double threat of rising prices and rising financing costs. The Bank of Canada will therefore be forced to reconsider its rate cutting program: according to Mendes, a constant flow of cuts may not be enough and the Canadian central bank may have to start considering larger cuts of half a percentage point or more if the economy shows no signs of rapid improvement.
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