Key Takeaways
- The Canadian job market clocked back-to-back declines in July and August.
- The unemployment rate hit its highest level since 2016 as the trade war takes a toll on the economy.
- The August jobs report sharply raises the odds of a September interest rate cut from the Bank of Canada.
The Canadian economy posted a second straight month of job losses in August, sharpening odds that the Bank of Canada will pull the trigger on an interest rate cut this month after remaining on the sidelines since the last time it cut the interest rate in March.
In a sign of mounting weakness, Canada’s labor market registered 66,000 job losses in August after shedding 41,000 jobs the month before. That’s significantly worse than the FactSet consensus estimate of a 10,000 job gain for August.
In addition, the unemployment rate rose 0.2 percentage points to 7.1%, from 6.9% in the previous month, overshooting the consensus forecast of 7%. August’s reading marks the highest unemployment rate since May 2016, excluding the pandemic period.
According to Statistics Canada’s August Labor Force Survey, the decline was driven primarily by job losses in Ontario, British Columbia, and Alberta, in that order.
The sharp deterioration in the labor market has fueled expectations of a Bank of Canada interest rate cut. Following the report, market odds of a cut jumped to 85% for the central bank’s Sept. 17 meeting. Should there be any hesitation among central bank officials to cut interest rates, inflation data due on Sept. 16 could tip the scales if the report is tame, analysts say.
The two-year government of Canada bond yield shed 8 basis points, falling to 2.53%, while the Canadian dollar remained largely unchanged at 1.38 against the USD, or USD 0.72. The S&P/TSX Composite Index rose by 166 points, or 0.56%, to 29,073.77, responding to the latest labor market data.
Below are excerpts from economists’ commentary on the August jobs report.
Pressure Grows on the Bank of Canada to Cut Rates in September
“The Bank of Canada will need to balance increased slack in the economy, with a sharp contraction in economic activity in Q2 and big job losses in recent months, and core inflation remaining stubbornly slightly above its target. Since its June meeting, the Bank of Canada has made it clear that it would focus on inflation rather than on increasing slack in the economy. However, this is likely to change in September.
“A greater amount of slack in the economy than expected raises the likelihood of a cut in September, but a cut may still hinge on the next CPI release, the day before the policy meeting. Any signs of easing in inflation would mean a rate cut in September, even if core inflation remains around 3%. But an upside surprise to inflation could delay it.”
-Charles St-Arnaud, chief economist at Alberta Central
August Report Reinforces the Rate Cut Bias
“This weak report fully reinforces any bias for the Bank of Canada to ease somewhat further here, but inflation hasn’t quite given it the all-clear. The upcoming CPI report lands a day ahead of the next Bank of Canada meeting, and it looms large. This report, though, lands fully on the dovish side of the ledger.”
-Doug Porter, chief economist at BMO Economics
Employment Shocker Makes September Cut Look Almost Certain
“The huge 66,500 decline in August, together with a further rise in the unemployment rate, underscores that conditions in the labor market remain bleak amid the impact of tough US tariffs. The upshot is that a September cut from the Bank of Canada looks almost nailed on, with the prospect of another cut before the end of the year looking increasingly likely, too.
“As far as the Bank of Canada is concerned, this cements that there are growing levels of slack in the economy, which we expect will prompt 25-basis-point cuts in both September and December. Markets are now nearly fully aligned with our September call (with interest rate swaps pricing a 90% chance of a cut) and are gradually moving toward our December view as well.”
-Thomas Ryan, North America economist at Capital Economics
Job Market Deterioration Boosts September Cut Odds
“A further slump in employment, resulting in a larger-than-expected increase in the unemployment rate, adds to evidence that the Bank of Canada needs to restart interest rate cuts later this month.
“Overall, today’s data demonstrates the need for further interest rate cuts, and we continue to forecast a 25-basis-point move in September with another to follow in Q4.”
- Andrew Grantham, senior economist at CIBC Economics
Multiple Cuts in Play to Stem Economic Bleeding
“Despite easing trade tensions, Canada’s labor market showed further signs of deterioration in August. The sharp increase in the unemployment rate came despite falling participation and near-stagnant population growth. The sharp slowdown in the pace of population increase—a result of the government’s immigration policies—will keep a lid on revenue growth at businesses that benefit disproportionately from a growing customer base.
“Weakness, which was previously isolated in highly trade-dependent sectors, now appears to be spreading across the economy, a risk we had flagged when the Bank of Canada moved to the sidelines earlier this year. Employment decreased across several sectors, with both highly trade-exposed and non-exposed industries seeing declines.
“The ugly employment numbers released today should be enough to push those who had been in the ‘no cut’ camp to reassess their outlooks. We continue to see the Bank of Canada reducing its policy rate by 25 basis points later this month and ultimately down to a terminal rate of 2.00% to stem the bleeding in the economy. Markets are coming around to the view that the Bank of Canada will need to move more clearly into stimulative territory, but remain underpriced for the coming easing in our view.”
-Royce Mendez, managing director and head of macro strategy at Desjardins Capital Markets
August Report Supportive of 2 More Cuts
“The impact of the trade war looks to be broadening to less directly trade-exposed sectors. The recent removal of most Canadian counter-tariffs and rising USMCA compliance will cushion the economic impact of the trade war on Canada’s economy, but it is still likely to teeter on the verge of recession in the second half. There will likely be more job losses to come that could lift the unemployment rate even higher.
“Lower Canadian counter-tariffs also reduce the upside risks to inflation and lessen uncertainty from the trade war, which we believe will convince the Bank of Canada that it can now lower rates, albeit cautiously. Today’s weak job report will likely reinforce that view. We expect the Bank of Canada to cut rates by 25 basis points in September and October, bringing the overnight rate down to the low end of its neutral range.”
-Tony Stillo, director of Canada economics at Oxford Economics
Trade War Further Squeezes Canada’s Labor Market in August
“[The jobs data] adds to evidence that the trade war is taking its toll on Canadian labor markets … the negative job market report today increases the odds that the Bank of Canada could see fit to cut interest rates further.
“The next CPI print in Canada will bear an unusual amount of weight as a deciding factor. Another softer inflation print could raise odds for additional easing relative to our current base case that assumes the Bank of Canada has already reached the end of the cycle.”
-Claire Fan, senior economist at Royal Bank of Canada
Canadian Economy Needs a Cut as Job Losses Mount
“The economy shed jobs in back-to-back months, the first time since 2021, pushing the odds of a rate cut this month significantly higher. Even more troubling, weakness in the labor market has begun to spill over into the services sector, which is typically less sensitive to trade policies than the goods sector.
“A reaction from the Bank of Canada is widely expected this month, as a rate cut would help inject much-needed confidence into the market. With the ongoing trade dispute with the US, the Canadian economy remains under heavy pressure. At the same time, the US is also experiencing weak job growth tied to trade policies.”
-Tuan Nguyen, economist with national assurance, tax & consultancy firm RSM
The Next Inflation Report Will Seal the Rate Cut Deal
“July and August’s job losses have now more than reversed June’s outsize gain, and the Canadian economy has lost 39,000 jobs since January. The unemployment rate has risen half a percentage point over the same time period. It could be worse, though; a slowdown in labor force growth is keeping the unemployment rate from rising too high despite weak labor demand.
“August’s report is consistent with the Bank of Canada’s characterization of ‘an excess supply of labor’ in July’s Monetary Policy Report. However, it hasn’t yet prompted it to lower rates beyond the pre-emptive cuts made early in the year. Markets are now putting odds on the next cut coming in September. We have long expected two more cuts this year, with the inflation report likely to help cement the timing of the next cut.”
-Leslie Preston, managing director and senior economist at TD Bank
