Canada's unemployment rate reaches 29-month high amid economic concerns

Canada's unemployment surged to a 29-month high at 6.4 per cent last month, pointing to impending job losses as the labour market contends with the rapidly swelling population.

The updated jobs report showed that the unemployment rate among youth surged to the highest since March 2013, excluding pandemic years.

It's a move that has already sent money markets pricing in a rate cut from the Bank of Canada this month to around 56 per cent, from 40 per cent a day earlier.

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Economists say the upward movement in the unemployment rate is signalling a recession.

According to Doug Porter, chief economist at BMO Capital Markets, "A sustained deterioration is typically only seen during recessions," as the jobless rate has risen 1.4 percentage points since January of last year.

He said it would likely prompt the central bank to reduce rates in July if the unemployment rate were considered in isolation.

It added that the economy lost 1,400 jobs in June—contrary to analysts' expectations of job gains of 22,500—which further underlined weakening economic conditions.

Royce Mendes, head of macro strategy at Desjardins Group, said the large increase in the unemployment rate raises questions about whether Canada has entered a recession.

Mendes believes that a small interest rate cut will blunt the impact of the impending mortgage renewals and retain a chance for a soft landing.

He predicts one 25-basis-point rate cut by the BoC this month, followed by two more cuts in the next three meetings.

BoC Governor Tiff Macklem said last month the labour market had been losing steam in recent months, and hitting the central bank's inflation target did not require a sharp increase in unemployment.

He added that there was space to grow the economy further without putting the BoC's 2 per cent inflation target at risk.

The Canadian dollar weakened 0.25 per cent against the U.S. dollar to 1.3647, or 73.28 U.S. cents at 1352 GMT. Yields on the Canadian government's two-year bonds declined 9.1 basis points to 3.961 per cent.

Growing unemployment paired with wage reluctance spells an unfavourable scenario for the BoC as a result of the activities it carries out to ensure the price levels are in check.

Hourly wages of permanent employees rose at an annualised 5.6 per cent, the fastest pace since December's 5.7 per cent, and up from 5.2 per cent in May.

The Bank of Canada agent for pay growth that it monitors is a fuel for inflation. Economists say that wage growth will soon fall in step as unemployment rises.

The central bank cut its key policy rate for the first time in over four years in June and said more cuts were probable if inflation continued to fall.

The next rate announcement from the BoC is due July 24, just after the next inflation data is published on July 19, which will be key to nailing down expectations for the rate cut this month.

The overall increase in part-time jobs was 22,300 in June, amid declining full-time employment.
Nevertheless, employment in the goods-producing sector—especially farming jobs—rose by a net 12,600 jobs, against a decline of a net 14,100 jobs in the services-producing sector.

(With inputs from Reuters)