Canada: Labour market resilience supports cautious Bank of Canada – NBC

National Bank of Canada (NBC) economists Matthieu Arseneau and Alexandra Ducharme highlight robust Canadian labour data for July, with 75.1K jobs added, a lower unemployment rate and stronger private-sector hiring. They point to solid economic momentum and easing wage pressures, but argue that persistent excess labour supply and temporary employment supports mean the Bank of Canada (BoC) should not rush to raise interest rates.

Solid jobs but policy caution

"July’s LFS data point to continued strength in the Canadian economy at the start of the third quarter. Following GDP growth of around 3.0% in Q2 (official data to be published on August 28th), which supported a recovery in the labour market over the quarter, employment gains strengthened further in the first month of Q3, with a spectacular increase of 75K jobs and a 0.6% rise in hours worked."

"Once again, the private sector is leading the way with a gain of 58K. Over the past three months, businesses have increased their workforce by 146K, a three year high. This strong performance was made possible by a recovery across most sectors."

"Overall, July’s jobs data confirm that the labour market is not as concerning as it was earlier this year, when the unemployment rate was rising and hovering around 7.0%. That said, it is important to remember that the labour market has been in a state of excess supply for quite some time (unemployment mostly in the 6.5% 7.0% range), which is reflected in wage pressures, which remain contained."

"Our assessment of the labour market has led us to conclude in recent months that the risks of second-round effects on inflation (via wages) resulting from rising energy prices are more limited in Canada than in some other advanced economies. We continue to believe that this is the case."

"Given this context, we do not believe the central bank should rush to raise interest rates. First, the labour market remained artificially buoyed by temporary factors, namely the census and a tourism boom in the wake of the FIFA World Cup."