Canada's jobless rate ticks up in May, wage growth accelerates too

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) - Canada's jobless rate edged up to a more than two-year high in May and wage growth accelerated, data showed on Friday, giving two diverging signals on how the Bank of Canada will digest the reading for its next rate decision in July.

The unemployment rate was up to 6.2% from 6.1% in April, matching forecasts. The jobless rate, on an upward trend over the past year, has risen 1.1 percentage points since April 2023, Statistics Canada said.

However, the average hourly wage growth for permanent employees accelerated to an annual rate of 5.2% from 4.8% in April, Statscan data showed. That growth rate was the highest since January's 5.3% rate.

Rising unemployment is a sign in part of the economy buckling under the pressure of high interest rates. But quicker wage growth, especially when growing faster than inflation, complicates the fight to rein in consumer price increases. Annual inflation in April stood at 2.7%.

"Little bit of an ugly job report," said Jules Boudreau, senior economist, Mackenzie Investments.

"The biggest worry is that the wages have gone up and that's a problem for the Bank of Canada," he said, adding that in the past the bank was hesitant to cut rates because wages were rising too quickly.

Money markets, which had been betting for an over-50% chance of a rate cut in July, trimmed bets to 44% after the jobs data.

The BoC had warned on Wednesday that if wage growth remains high it could slow progress on taming inflation and economists cautioned the bank should move slow with rate cuts. The BoC cut its key policy rate to 4.75% and indicated that further easing would be gradual and dependent on data.

The bank will have another month's job data before its next rate decision announcement on July 24.

The Canadian dollar was trading 0.36% lower at 1.3717 to the U.S. dollar, or 72.91 U.S. cents, as investors also weighed stronger-than-expected U.S. jobs data.

The jobs gains in the economy were marginal at 26,700 but surpassed the numbers forecast by analysts in a Reuters poll by over 18%.

This was primarily because a continued increase in population offset the economy's ability to absorb people coming into the labor market.

Economists had said that with no slowdown in population growth seen in the short-term, any job additions below 45,000 people would push the unemployment rate higher.

"It's a weak enough increase in employment, given the unemployment rate change, for the BoC to feel comfortable cutting rates again at the next meeting," said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities.

However, he said wage growth above 5.2% could be a concern for the BoC.

The jobs data came at the same time as U.S. employment data which showed that non-farm payrolls increased by 272,000 jobs last month, which bolstered expectations of a hold on rate cuts by the Federal Reserve till September.

The Canadian employment gains in May were driven by part-time work, which more than offset full-time positions lost in the month, StatsCan said.

It noted that the proportion of part-time workers who could not find a full-time job or worked part-time due to poor business conditions was 18.2% in May, the highest since December 2021.

In May, employment in the goods sector decreased by a net 20,700 jobs, mainly in construction, while the service sectors gained a net 47,400 positions, led by healthcare and social assistance as well as finance-related jobs.

(Additional reporting by Dale Smith; editing by Andrea Ricci and Mark Heinrich)