Canada’s Unemployment Rate at 6.6%; Economists Urge Larger Rate Cuts

By Promit Mukherjee

OTTAWA – Canada’s unemployment rate increased to 6.6% in August, surpassing a seven-year peak when excluding the pandemic years of 2020 and 2021, according to data released on Friday. This rise has led economists to advocate for more significant interest rate cuts from the central bank.

Recently, the Bank of Canada reduced its key policy rate by 25 basis points to 4.25%, marking its third consecutive cut. Governor Tiff Macklem mentioned that further reductions could be considered if the economy shows signs of needing additional support.

In August, the economy created a net total of 22,100 jobs, bouncing back from a previous decline, although this growth was entirely attributed to part-time employment, as reported by Statistics Canada.

Analysts had predicted a jobless rate of 6.5% and forecasted an increase of 25,000 jobs for the month. Royce Mendes, head of macro strategy at Desjardins Group, indicated in a report that there remains a significant chance the central bank will need to lower the policy rate by 50 basis points in October to keep pace with economic conditions. However, he noted that additional economic data before the next policy meeting would help clarify the likelihood of such a move.

Following the announcement, financial markets adjusted their expectations for an October rate cut from 98% to 93%. Traders are now pricing in two 25 basis point cuts by December, with some considering an even larger cut of 50 basis points next month.

The Canadian dollar dipped by 0.13% against the U.S. dollar, while yields on two-year government bonds decreased by one basis point to 3.272%.

Canada’s unemployment rate has climbed by 1.6 percentage points since January 2023, which some economists find concerning, prompting calls for more substantial rate cuts to stimulate growth. The increase in unemployment has been most pronounced among youths aged 15 to 24, with their jobless rate this summer reaching an eight-year high.

Macklem stated that sluggish employment growth could temper robust GDP growth forecasts for the third quarter. Economic progress slowed in June, with similar results anticipated for July, potentially falling short of the Bank of Canada’s 2.8% growth projection for this quarter.

Doug Porter, chief economist at BMO Capital Markets, remarked that the report underscores the growing slack in the Canadian economy, especially in the labor market, suggesting that the odds of a 50 basis point rate cut are increasing. As GDP growth has not kept pace with population growth in Canada, rising unemployment has raised concerns about a potential recession.

Moreover, the employment rate, which reflects the percentage of working-age individuals (15 years and older) with jobs, has been declining, hitting 60.8% in August. This figure has fallen in 10 out of the last 11 months.

Additionally, the average hourly wage growth for permanent employees slowed to an annual rate of 4.9% in August, down from 5.2% in July. This wage growth, which has contributed to sustained inflation, is closely monitored by the Bank of Canada.