Key Takeaways
- The Canadian labor market added 88,000 jobs in May, sharply reversing course from April’s losses.
- The strong jobs data eases recession worries, but trade negotiations and Iran-war-linked energy inflation remain in focus, according to analysts.
- The unemployment rate fell to 6.6%, allowing the Bank of Canada to remain on the sidelines.
The Canadian labor market roared back with 88,000 job gains in May, according to the latest Statistics Canada report, showing signs of resilience despite a weak economic outlook. Still, analysts say that isn’t enough to move the Bank of Canada off the sidelines as it weighs the impact of higher energy prices linked to the Iran war and upcoming trade negotiations with the United States.
The surprise increase is a rebound from 18,000 job losses in April, blowing past the FactSet consensus estimate of 12,500 additions. Employment gains were driven primarily by the addition of 154,000 full-time positions across industries in May. This is the first time the economy has posted significant employment gains since November 2025.
In another sign of the labor market’s resurgence, the unemployment rate fell to 6.6% in May from 6.9% the prior month, below the 6.9% FactSet estimate. This is the second-lowest jobless rate recorded this year, behind the 6.5% in January.
Renewed strength in the job market comes after a first-quarter contraction in GDP, which brought the Canadian economy into a technical recession. Meanwhile, the Bank of Canada remains concerned about higher energy prices driven by the war in the Middle East, saying any spillover into the broader economy could necessitate multiple rate hikes. Analysts say these factors, as well as subdued business and consumer sentiment, mean the Bank isn’t likely to hike rates in the near future.
The Morningstar Canada Index slid 1.17% to 6,191.70 following the release of the latest employment report. The two-year government of Canada bond yield edged 0.09 percentage points higher to 2.91%, while the Canadian dollar held steady at C$1.39 against the USD, or 0.71 US cents.
The Bank has held its policy rate at 2.25% since December, after issuing four quarter-point rate cuts in 2025. Policymakers are due to announce their next rate decision on June 10. Economists broadly expect the Bank to leave rates unchanged, with policymakers continuing to view energy-related inflation as temporary.
The following are excerpts from economist commentaries on the May jobs data.
Jobs Data Calms Concerns About the Economy
“Before getting too excited, keep in mind that employment is still up just 0.7% y/y and hours worked are up 0.3% y/y. However, this is an unambiguously strong report. Canada continues to hold in. This report should ease Bank of Canada worries about the economy somewhat after the negative GDP print. Still, the back-to-back negative GDPs, lower oil, and tame core CPI point to a less hawkish Bank of Canada next week than in April ... though the shift will be less material than if this report were weak.”
—Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO Economics
The Report Doesn’t Move the Needle on Interest Rates
“The Canadian labor market sparked back to life in May, with the 88K gain in jobs well above consensus expectations and taking the unemployment rate back down to 6.6%. However, while much stronger than expected, the release should be viewed in the context of the weakness seen earlier in the year. The six-month average for employment is still slightly negative (-2K), and the unemployment rate is a touch higher than the recent low recorded in January.
“For the Bank of Canada, today’s release shouldn’t change the current on-hold stance, even with the large headline beat. For now, today’s strength has brought us back to where we stood earlier in the year, and further tightening in the labor market will need to be seen (alongside an acceleration in core inflation) to bring the Bank of Canada off the sidelines.”
—Andrew Grantham, senior economist at CIBC Economics
Canadian Economy Remains Exposed to Trade Deal Talks
“Canada’s labor market showed signs of life in May, with a strong rebound in job creation. The rebound largely reverses the job losses observed earlier in the year, with the level of employment now just shy of its December 2025 peak. Yields across the Government of Canada curve are rising, led by the short end, where traders are now pricing in between one and two rate hikes for the remainder of this year. That said, given the volatility in the Labor Force Survey, it’s difficult to have much confidence in the signaling power of today’s reading. We continue to see downside risks for the Canadian economy, both from fundamental weakness and trade negotiations.”
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
Job Market Rebound Eases Recession Worries
“The strong rebound in employment and the fall in the unemployment rate to 6.6% will provide some relief to the Bank of Canada that the economy is not in or on the verge of recession. While wage growth slowed, the strength in the labor market presents a risk to our view that the Bank of Canada will keep rates on hold this year.
“Meanwhile, wage growth slowed sharply, with average hourly earnings growth of employees plunging to 3.0% y/y from 4.5% y/y in April, which will be some comfort to the Bank of Canada as it considers the risk that higher oil prices could trigger second-round inflation risks.”
—Ariane Curtis, senior North America economist at Capital Economics
The Economy Remains Vulnerable to Energy Inflation and Trade Negotiations
“The jump in employment in Canada in May was still just the second increase in the last five months and still left the employment count down slightly year-to-date in 2026. But we have argued before that a sharp slowing in population growth is distorting the comparison of employment growth relative to historical comparisons—~26k workers retired per month over the last year, and caps on temporary resident arrivals are reducing the supply of workers available from abroad.
“Looking ahead, the economic growth backdrop still faces headwinds. Trade uncertainty remains ahead of negotiations to extend CUSMA this summer, and higher energy prices are cutting into household purchasing power. But we remain cautiously optimistic that per-person economic growth and labor market conditions will continue to gradually improve this year, with the unemployment rate edging broadly lower.”
—Nathan Janzen, assistant chief economist at Royal Bank of Canada
A Weaker Economy Offsets Energy Inflation, Allowing the Bank of Canada to Remain on Hold
“No bones about it, this is a solid report. Strength in hiring across public and private sectors, and a whopping 154k jump in full-time jobs. However, this basically brings employment back to where it was in January, with an unemployment rate 0.1 percentage points higher.
“There continues to be a lot of noise in the Canadian economic data. The surprise contraction in first-quarter GDP was disappointing, but with April’s flash GDP estimate signaling a 0.4% monthly gain and now May’s labor force report showing a drop in the unemployment rate, we continue to expect a second-quarter bounce-back in activity. Nonetheless, the economy continues to operate below capacity, providing a disinflationary offset to the energy price shock. With this backdrop, we expect the Bank of Canada to stay on the sidelines next week and keep its policy rate at 2.25%.”
—Andrew Hencic, director and senior economist at TD Economics
