Canada’s unemployment rate climbed to a 29-month high of 6.4% in June, raising concerns about a potential recession and increasing expectations of a rate cut by the Bank of Canada (BoC) this month.
The rise in unemployment, which saw a net loss of 1,400 jobs in June, is a significant development as it marks a substantial increase from May’s 5.9% and January 2022’s 5%. Economists have pointed to the sustained deterioration in the labor market as a potential indicator of a recession.
“A sustained deterioration is typically only seen during recessions,” said Doug Porter, chief economist at BMO Capital Markets, noting the 1.4-percentage-point rise in the jobless rate since January last year.
The jobs report, which also showed youth unemployment reaching a near decade high excluding the pandemic years, has prompted money markets to significantly increase their bets on a rate cut by the BoC this month. The probability of a rate cut has risen to 56% from 40% a day earlier.
Despite the rising unemployment rate, wage growth continues to be a concern for the BoC in its efforts to control inflation. The average hourly wage growth for permanent employees accelerated to an annual rate of 5.6% in June, the fastest rate since December. However, economists believe this growth will soon align with rising unemployment levels.
The BoC lowered its key policy rate for the first time in over four years in June and signaled that further cuts are likely if inflation continues to cool. The bank’s next interest rate decision is scheduled for July 24, with the release of inflation data on July 18 expected to play a crucial role in solidifying expectations for a rate cut this month.
The Canadian dollar weakened against the US dollar following the release of the jobs report, falling 0.25% to 1.3647. Yields on the Canadian government’s two-year bonds dropped by 9.1 basis points to 3.961%.
The BoC will be closely monitoring economic data, including inflation, to determine its next steps.