According to the economists, the labor market is “gasping for air.”
An economist from the National Bank of Canada warns that if the Bank of Canada (BoC) doesn’t decrease interest rates “sooner rather than later,” the Canadian unemployment rate would likely reach or surpass seven percent this year.
Taylor Schleich, director of economics and strategy at National Bank Financial Markets, stated in a note released on Monday that the labor market is “gasping for oxygen”. And it shouldn’t be disregarded due to an obsession with inflation statistics alone.
“In our view, a July cut is a more likely result. Because the BoC should only be sidelined in the event of a catastrophic June CPI data.”
In terms of Canadian unemployment signals, Schleich notes that while the May inflation print “wasn’t ideal.” “We don’t believe it’s prudent to miss the forest for the trees” because “inflation considerably better behaved” than it has recently.
If current (worsening) labor market conditions continue, an unemployment rate of at least 7% is in store for this year.
In June, the Bank of Canada lowered interest rates to 4.75 percent, marking the first rate reduction in almost four years. The market has been mostly divided on whether or not there would be another rate decrease. But the next rate announcement is scheduled for July 24.
The June labour market statistics for Canada showed a net loss of 1,400 jobs, which was less than most experts had predicted. This caused the unemployment rate to rise to 6.4%, or 0.2 percentage points, higher. From a post-pandemic low of less than 5% in 2022, that percentage has been gradually rising. And it is doing so faster than in many other comparable nations. “The biggest gain among the G7 is 1.6% from the 2022 low,”
Schleich says in an email to Yahoo Finance Canada that most economists concur that the Canadian unemployment rate at which inflation should ideally stay constant is about 6%. This is known as the non-accelerating inflation rate of unemployment, or NAIRU.
He responded, “So we’re there, or just over that level, but we’re rising up very rapidly.” “We believe that the BoC has to reduce rather swiftly to stabilize those data before they grow too high,” acknowledging that “there are delays of monetary policy,” meaning that changes in interest rates often do not immediately affect employment figures.
According to forecasts in the National Bank note, the rate will rise to 7.5% in the spring of next year. Continuing the three- and six-month average patterns for unemployment rises. This is an result that interest rate reduction are projected to offset.
Schleich points out that pay growth statistics are usually a trailing indication. Despite the fact that some economists have used still-resilient wage growth rates as justification for the BoC’s delay.
“The inevitable weakening of labor market conditions should lead to a slowdown in wage growth. Paying ever-higher salaries is just unnecessary when an increasing number of people are choosing not to work.
