Two key data releases last week support the view that the Bank of Canada is done raising rates.
Unemployment numbers creep up
In November, despite the decent increase in the number of jobs being created, the unemployment rate increased by 0.1% to 5.8%. With tight monetary conditions, the economy is unable to generate enough jobs given the growth in the labour force (+78,000).
More people are becoming unemployed because of layoffs rather than leaving their jobs voluntarily. Although the rise of 60,000 full-time jobs seems encouraging, data from the Canadian Federation of Independent Business (CFIB) indicates that the shortage of skilled labor is no longer the primary worry for small business owners. Instead, their greatest concern now revolves around domestic demand.
While the unemployment rate edged up, hours worked contracted (-0.8%) for the first time since the second quarter of 2020 when the economy was in full shutdown due to the pandemic. Wage inflation was 5% year-over-year, which was unchanged from October.
Real GDP flat over the last two quarters
Canadian real GDP fell at an annualized rate of 1.1% in the third quarter, according to data published by statistics Canada. Results were much weaker than the moderate +0.1% growth analysts expected. Statistics Canada made significant upward revisions to its second quarter growth figures from a modest decline of -0.2% to positive growth of 1.4%. Although this revision means Canada avoided two consecutive quarters of GDP decline – the definition of a technical recession – it does not change the fact that the economy is not growing. The monthly flash GDP estimate for October is a strong +0.2%. This is counter to the thinking that the economy is likely to shrink in Q4, but in line with the Bank of Canada’s forecast of 0.8% growth for the quarter.
Nominal GDP was up 6.4% in the third quarter as the GDP deflator grew 7.4%. (The GDP deflator is an index that tracks the average prices of goods and services produced across the economy over time. It shows the effect of inflation on GDP.) Household disposable income remained strong, growing at a 4.0% annual rate in Q3. The personal saving rate, which has been holding around 5.0% for the last two years, stood at 5.1%. This is good news for lenders as it suggests borrowers’ incomes are growing along with their savings.
Overall, the numbers reinforce the view that the Bank of Canada won’t increase interest rates further, but they’re not significant enough yet for the Bank to consider a rate cut. While the flash data on output is positive, the labour market is showing signs of reaching balance at an unemployment rate of roughly 6% – 6.25%. That the Bank might negatively impact the job market too severely remains a risk – and an open topic for discussion.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
In the wake of the federal government’s Fall Economic Statement, released on November 21, expert and media analysis has focused primarily on future government housing spending. In the latest Housing Affordability Watch, we examine a few highly important but overlooked items that warrant a closer look. Read it here: CMI Housing Affordability Watch: What Analysts Missed in the Fall Economic Update.
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