Canada Employment Preview: The balance is changing fast

• July job creation to be below trend
• Unemployment remains near 45 year low
• Business sentiment down sharply in June and July

Statistics Canada will issue its Labour Force Survey for July on Friday August 9^th at 12:30 GMT, 8:30 EDT.

Forecast

The Canadian economy is expected to add 12,500 jobs in July after losing  2,200 in June and adding 27,700 in May and a record 106,500 in April.  The unemployment rate is predicted to be unchanged at 5.5%. The participation rate is projected as stable at 65.7%. Average hourly wages rose 3.60% on the year in June. Full-time employment climbed 24,100 in June; part-time work went down by 26,200.

Canadian labor economy

The Canadian economy has had a remarkable record of job creation this year.  The 3-month moving average has been above 40,000 for five of six months.  The half year to April saw the third largest number of new positions since October 2002, surpassed only by January this year and November last.  The surging labor economy has lowered the unemployment rate to 5.4% in May, a 45 year record and 5.5% in June.   The 12-month employment change moving average in May was the highest level since March 2003.

Reuters

Canadian Economic Background

The job additions have come in contrast to a decelerating GDP.  Quarterly annualized growth has dropped from 2.5% in the second quarter of last year to 2.1% in the third, 0.3% in the fourth and 0.4% in the first three months of this year.  The second quarter will be reported on August 30^th. In the same period the 3-month employment change moving average has gone from 14,200 in the second quarter of 2018 to 25,300 in the third, 32,600 in the fourth, 38,500 in March and 44,000 in June of this year.

The surge in hiring coincided with a sharp rise in the Ivey purchasing managers’ composite index. It jumped from 48.2 in December and 49.5 in January both below the 50 expansion-contraction line, to 61.8 in May.  The June and July figures of 53.7 and 51.2 seem to reflect the recent escalation of the trade dispute between China and the United States and its potential impact on US, Canadian and global economic growth.

Reuters

Annual core inflation was 2.0% in June and 2.1% in May. The return of price changes to the Bank of Canada’s 1-3% overall range and 2% target, having been at 1.3% in May 2018 and 1.5% in April has largely removed inflation from the Bank of Canada’s list of worries.

Reuters

The Canadian economy has performed well despite the background of the 18 month US-China trade dispute. The impact on Canada’s largely resource based economy and the concerns of the Bank of Canada are likely to rise given the recent jump in tensions between the Pacific antagonists.

Bank of Canada

The Bank of Canada (BoC) has not yet joined the rate cutting crew. It remained on hold after its May 29^th and July 10^thpolicy meetings.  Though noting in its statement in July that “Evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook.” The bank meets next on September 4^th.

Since then the US Federal Reserve has reduced the fed funds rate 25 basis points to 2.25% on July 31^st, in its first cut since December 2008.  The Reserve Bank of Australia has cut twice in June and July from 1.5% to 1.0%, a record low.  The Reserve Bank of New Zealand decreased its base rate by 50 basis points on August 6^th to 1.0% an all-time low, surprising market expectations for a 25 point cut.

The Reserve Bank of India reduced its base rate by 0.35% in its fourth straight meeting and the Bank of Thailand unexpectedly cut by 0.25% for its first reduction since 2015.

Canadian Dollar

The Canadian Dollar was on the upswing against its southern neighbor from early June until mid-July, improving from 1.3512 on May 31^st to 1.3025 on July 18^th. The pending Fed rate cut and the reluctance of the Bank of Canada to ease provided the edge.

Since then the situation has reversed despite the Fed cut on the 31^st of July and there being no BoC meeting until early September. Safe-haven flows to the dollar and the threat to the resource based Canadian economy from the US China trade war have put the loonie in reverse.  On the afternoon of August 7^th it was trading just under 1.3300, about a 2% loss.  

Conclusion

The fast moving international trade situation and the evident concern of central banks around the world will increase the calls on the BoC to join the rate reductions. The anticipation is part of the logic pushing the Canadian Dollar lower despite the successful performance of the economy.

A stellar jobs for July report will do little to blunt the pressure for a rate reduction and a weak number will increase it exponentially.