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Canada's unemployment rate ticks up; BoC pause more likely

Average hourly wage up 5% year-over-year even as economy lost a net 6,400 jobs

Workers walk past the HS2 high-speed rail construction site at Euston Station in London, Britain, July 30, 2023. REUTERS/Hollie Adams
Canada shed a net 6,400 jobs in July, according to Statistics Canada, (REUTERS/Hollie Adams) (Hollie Adams / reuters)

Canada unexpectedly shed a net 6,400 jobs in July and the unemployment rate ticked higher for the third consecutive month, bolstering expectations that the Bank of Canada will put its tightening cycle on pause.

Canada's unemployment rate increased to 5.5 per cent in July, up from 5.4 per cent in June, as strong population growth outpaced job growth.

The print came as a surprise to analysts polled by Reuters, who had expected a net gain of 21,100 jobs. The unemployment rate was in line with analyst expectations.

Job losses were led by the construction industry, while most of the job gains were in healthcare and social assistance.


"It's clear that underlying momentum in the economy is slowing," Royce Mendes, Desjardins' managing director and head of macro strategy, wrote in a note on Friday.

Still, while the overall job count fell, the average hourly wage increased five per cent year-over-year in July. While Mendes says the wage growth "remains too hot to be consistent with a 2 per cent inflation rate," he notes that "wages tend to respond to tightness in the labour market with a lag."

"The simple fact that the economy has seen employment decline in two out of the past three months suggests that the Bank of Canada's efforts to rebalance the labour market are working," Mendes wrote.

"As a result, today's data reinforce our view that the central bank is done raising rates for this cycle."

The Bank of Canada has hiked rates by 475 basis points since March 2022, most recently bringing its benchmark rate to 5 per cent in July, the highest level since 2001. The central bank will make its next rate announcement on Sept. 6.

CIBC economist Andrew Grantham says July's wage growth will be a concern for the Bank of Canada.

"While the wage figure from these labour force statistics can be very volatile on a month-to-month basis, the July print was well above consensus expectations and will be a concern for the Bank of Canada as it tries to judge how much the labour market needs to loosen to sustainably bring inflation back to its 2% target," Grantham wrote in a note.

BMO chief economist Douglas Porter says the steady rise in the unemployment rate "is an important signal that the economy is struggling to keep pace" with rapid population growth.

"The soft July employment report is just the latest arrow in the quiver of signs that the economy is losing momentum," Porter wrote.

"Along with the recent friendly CPI result, we believe that the case for the Bank of Canada moving to the sidelines is now very strong. Looking beyond the next rate decision, we suspect that the Bank may be done raising rates, although still-firm wage and core price growth means that rates are likely to stay high for long."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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