The Canadian labour market is showing no signs of slowing despite high interest rates, a trend that may force the Bank of Canada to raise rates further if it continues.
Statistics Canada’s latest labour force survey released Friday showed that the economy added a whopping 150,000 jobs in January.
Meanwhile, more Canadians were working or looking for work as 153,000 people joined the labour force.
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Royce Mendes, Desjardins’ head of macro strategy, said strong job numbers suggest interest rates are either not high enough or haven’t had enough time to affect the economy more broadly.
“At this point, it’s unclear what the appropriate reaction from the Bank of Canada is. But it certainly raises the odds that they may have to re-engage with rate hikes this year,” Mendes said.
With the job market still tight, the country’s unemployment rate held steady at five per cent, hovering just above the record low of 4.9 per cent reached in the summer.
The Canadian economy has been on an upward trend with employment since September, adding a total of 326,000 jobs.
That’s despite forecasters anticipating the higher cost of borrowing will slow the economy down significantly this year and affect employment levels.
In its Jan. 25 decision, the central bank indicated that it plans to stop raising interest rates for now, allowing time for higher interest rates to work their way through the economy.
But the Bank of Canada stressed the pause was conditional, leaving the door open for more rate hikes if inflation proves to be stubborn.
In January, Statistics Canada said job gains were made across sectors in the economy. Wholesale and retail trade experienced the largest gains to employment, adding 59,000 jobs, followed by 40,000 jobs added in health care and social assistance.
Most jobs added to the economy were full-time, while people aged 25 to 54 drove the gains.
In a client note, TD director of economics James Orlando called Friday’s report a “blowout.”
“The fact that gains were concentrated in full-time jobs in the private sector, alongside more people working more hours, makes this an even more impressive report,” Orlando wrote.
The job gains also come at a time when tech and retail layoffs are grabbing headlines.
But Brendon Bernard, a senior economist with hiring website Indeed, said layoffs regularly happen and don’t necessarily influence overall job numbers.
“Individual companies really don’t move the needle on these aggregate nationwide employment figures,” said Bernard.
The Canadian job numbers for January coincide with similar strength in the U.S. economy, which added 517,000 jobs last month.
With the labour market running hot, wages have also been rising, though at a slower pace than inflation. In January, wages were up 4.5 per cent on a year-over-year basis, growing at a slightly slower pace than in December.
The slower wage growth partly reflects relatively high average wages in January 2022 as COVID-19 restrictions caused job losses in lower-paying sectors.
Revisions to labour force survey data suggest wage growth peaked at 5.8 per cent in November.
Since March, the Bank of Canada has raised its key interest rate eight consecutive times, bringing it to 4.5 per cent. That’s the highest it’s been since 2007.
Typically, higher interest rates cause businesses and people to pull back on spending. As spending slows and sales fall, businesses may alter hiring plans.
As the central bank remains laser-focused on bringing down the country’s inflation rate, which stood at 6.3 per cent in December, it’s insisted the tight labour market is a sign of an overheated economy that’s fuelling inflation.
The central bank is hoping to see easing in the labour market, something it says is necessary for inflation to come down to its target of two per cent.
While economists generally note employment is the last indicator to turn during an economic slowdown, the labour market has been surpassing most economists’ expectations.
The Bank of Canada is aiming for a “soft landing,” where inflation falls without the onset of a serious economic downturn.
And although the economy is holding up better than expected, Mendes said it’s too early to say whether the Bank of Canada will pull off the soft landing.
“I think higher interest rates still need time to work their way through the economy more fully before we can say that we’re out of the woods in terms of the potential for a recession.”