- National Bank economist warns of potential unemployment rise to over 7% without imminent interest rate cuts.
- The Bank of Canada may need to cut rates in July to address worsening labor market conditions.
- Recent labor market data shows a concerning trend with a net loss of jobs in June.
A window washer cleans the windows at CIBC Square at 81 Bay Street across from Scotiabank Arena in Toronto. July 4, 2024. (Steve Russell/Toronto Star via Getty Images)
Canada’s unemployment rate could climb to seven percent or higher this year if the Bank of Canada (BoC) does not reduce interest rates soon, according to a warning from a National Bank economist. The labor market is “gasping for air” and needs immediate attention beyond inflation concerns, stated Taylor Schleich, National Bank Financial Markets director of economics and strategy, in a note published on Monday.
Labor Market Concerns
Schleich emphasized that a rate cut in July is likely necessary unless June’s CPI report shows significant deterioration. Despite May’s less-than-ideal inflation figures, he pointed out that the current inflation is more controlled than in recent times. Schleich cautioned that without intervention, the unemployment rate could exceed seven percent due to ongoing negative labor market trends.
In June, the Bank of Canada cut interest rates for the first time in over four years, setting the benchmark rate at 4.75 percent. The upcoming rate announcement on July 24 has the market divided on the likelihood of another cut.
Current Employment Data
Canada’s labor market data for June revealed a net loss of 1,400 jobs, which increased the unemployment rate to 6.4 percent, a 0.2 percentage point rise. This marks a continuous increase from the post-pandemic low of under five percent in 2022, with the rate climbing faster than in many other comparable countries. Schleich noted that the 1.6 percent increase since 2022 is the largest in the G7 and the fifth in the OECD.
Economists generally agree that the non-accelerating inflation rate of unemployment (NAIRU), where inflation remains stable, is around six percent. Schleich highlighted that Canada is currently at or slightly above this level but warned that the unemployment rate is rising quickly. Given the delayed impact of monetary policy on employment, Schleich argued that the BoC should act swiftly to prevent further increases.
Future Projections and Recommendations
Projections based on recent trends indicate that the unemployment rate could reach 7.5 percent by next spring if current dynamics persist. Interest rate cuts could counteract this rise. Despite some economists pointing to resilient wage growth as a reason to delay cuts, Schleich noted that wage growth is typically a lagging indicator and should eventually slow with the softening labor market.
“There’s just no reason to be paying ever higher wages when more and more workers are on the sidelines,” Schleich added.
Stock Market Implications
The potential rise in unemployment and the BoC’s monetary policy decisions could significantly impact the Canadian stock market. Investors will closely monitor the BoC’s actions and the resulting economic indicators, as these factors will influence market performance and investor confidence.
Conclusion
The National Bank’s warning underscores the urgency for the Bank of Canada to consider further interest rate cuts to stabilize the labor market. As the country grapples with rising unemployment rates, timely intervention could mitigate economic challenges and support both workers and businesses.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
