labour market stability… for now

Canada’s labour market has spent the past few years slowly deteriorating in the face of high interest rates that were in response to high inflation. While this has been reflected in a number of labour market metrics, it was most obvious in the unemployment rate, which rose from an all-time low of 4.8% in July 2022 to a peak of 6.9% last November. More recently, however, the unemployment rate has stabilized and started back on a downward trend as the Bank of Canada has been lowering its restrictive policy rate towards a neutral level. Since November, the national unemployment rate dropped in each of December and January, and held steady at 6.6% in February.

The February Labour Force Survey (LFS) data showed little month-to-month movement. Total employment grew marginally last month (+1,100) while unemployment fell (-17,900). The reason the unemployment rate didn’t change was that labour force participation also dropped, to 65.3%, while the overall employment rate was unchanged at 61.1%.

February’s LFS release shows us that the November and December numbers likely were the beginning of a new trend in Canada’s labour market, and not just some month-to-month volatility that can often come from a monthly survey. Inflation remains in check with the headline rate at 1.9% and the Bank of Canada’s policy rate is back in its theoretical neutral range (2.25-3.25%) at 3.00%.

With stability in the labour market and inflation, the Bank of Canada should have plenty of reason to be patient and hold the policy rate at its next interest rate announcement on March 12th. The one complicating factor, of course, is the 800 lb elephant in the room next door. If tariffs continue, labour market pain will result. With that, look to the Bank of Canada to lower its policy rate to offer relief to Canadian businesses and consumers, at some point. In their most recent summary of deliberations, the Bank’s Governing Council noted “Monetary policy is a blunt instrument that can only support or restrict demand across the whole economy. Fiscal policy, on the other hand, can be much more targeted, providing a cushion to help hard-hit workers and businesses, and help the economy adjust to long-lasting structural changes brought about by a protracted trade conflict”. This suggests a cautious path from the Bank going forward as we navigate this period of uncertainty.