Yahoo Finance Why the jobs market in Canada is defying odds of a slowing economy
Despite the labour market strength, don't expect the Bank of Canada to continue hiking, says an economist
If the Canadian economy was supposed to be in a recession right now, it seems nobody told the jobs market.
The labour market has defied gravity over the past several months despite a jump in interest rates, the persistent sky-high cost of living, and signs that the economy has been weakening.
"A lot of people have been concentrating on immigration but I think that kind of misses the point because we could have strong immigration and still have weak employment if there wasn't demand for the labour. The key point here is really the labour demand still looks stronger than we expected it to be," Stephen Brown, deputy chief North America economist for Capital Economics, told Yahoo Finance Canada.
Brown points out high-contact sectors that were hardest hit during the pandemic are still recovering and seeing employment surging. The construction sector, despite its sensitivity to interest rates, is also holding strong after suffering from a labour shortage and because mild weather has allowed construction to continue through the winter months.
BMO Capital Markets chief economist Doug Porter says immigration has indeed played a role, and also cites the ongoing recovery in certain sectors.
"The divergence isn't completely shocking, as we have such strong population growth now, and these newcomers need a job, that it's not completely odd that we can have both rising employment (supply driven) even as spending is slowing," Porter said.
"We know that many industries have been starved for workers since the reopening (notably retail and hospitality), so underlying demand for workers remains strong, even in a cooling economy."
The real test will be whether employment remains anywhere near as strong in FebruaryDoug Porter, BMO Capital Markets
Canada added 150,000 jobs in January, according to Statistics Canada, marking the latest in a string of job reports that far surpassed Bay Street expectations.
"The simple explanation is that companies are holding on tight to their workers," Porter said. "The real test will be whether employment remains anywhere near as strong in February."
"Of course, one other possible explanation – and completely plausible – is that the economy just isn't as weak as other indicators may suggest!" he added.
While some data point to a possible moderation coming in the labour market, for now, it appears many employers are still looking to fill vacant positions.
Job postings on Indeed Canada were 53 per cent above pre-pandemic levels as of Feb. 3, although they were down 12 per cent from their May peak.
"Despite all the uncertainty in the economy right now, when we look at job postings in most areas of the economy, employer demand remains pretty elevated," said Brendon Bernard, senior economist at Indeed.
"Big picture, there's still lots of job opportunities out there, with a few exceptions where momentum has shifted down significantly over the past six months, tech being the main example."
Jobs market brushes off recession calls
The much stronger-than-expected labour market is at odds with widespread calls last year that the economy would likely fall into a mild recession in early 2023.
It's also likely making it more difficult for the Bank of Canada to engineer a slowdown and bring inflation back down to its target of two per cent.
Considering where Canada is in the economic cycle, employment should, in theory, be levelling off and average hours worked should be falling, Brown says. But in reality, employment is still rising and average hours worked are flat, indicating to him that if Canada is heading for a recession, it's still in the "very, very early stages."
Brown revised his GDP forecasts up modestly, but is still calling for a shallow contraction in the near term.
He also rejects the notion that the strong January jobs numbers mean the Bank of Canada could be forced to continue hiking its benchmark rate.
"The flip side of very strong employment, particularly because it has at least mainly been driven by strong immigration, is that we're seeing measures of the labour market starting to loosen," he said.
"Vacancy rates have been coming down. We've seen a bit of downward pressure on wages. Those are all things the Bank is looking for to be confident inflation will come down again. So I don't think this means the Bank is going to change its mind and start raising interest rates again."
BMO Capital Markets also pushed its call for a recession to the second and third quarters of this year, from its previous forecast of a contraction in the first half of 2023.
BMO's Porter says "the job market is often one of the last elements of an economy to turn, when things are slowing down. That is, the unemployment rate is a bit of a lagging indicator — emphasis on 'a bit.'"
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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