News & analysis

Canada’s macroeconomic data has been incredibly noisy in recent months, making it nigh on impossible to accurately predict the state of the economy.

While GDP data has thus far outperformed both BoC and private forecasts for Q4 and core inflation has defied expectations by trending sideways, other data have pointed to economic weakness, loosening labour market conditions, and disinflation pressures in the pipeline.Amidst this storm, Canada’s labour market data has provided the most consistent read on the economy, even if lagged wage measures overstated the level of inflation. The overarching story from the labour market has been one of economic weakness. Cyclical industries such as retailing and food services have exhibited dramatic and sustained job losses, while overall labour demand has been struggling to keep pace with immigration.

This confirmed our view that core inflation would eventually break lower and that headline GDP data was overstating the strength of the economy, with a recession ongoing in per capita terms. The distribution in employment growth confirmed this view, with job losses concentrated in cyclical sectors, reflective of weak consumer demand.

Having told a compelling story over the course of the fourth quarter, the labour market data is now also falling victim to mixed messages. In January, 37.3k jobs were added, more than double consensus and the largest net employment increase since September. Employment gains were also concentrated in wholesale and retail trade (31k), reversing around 6-weeks of average job losses in the industry over the fourth quarter. On the surface, the data suggests that the narrative of weak consumer demand sustained throughout the back-end of last year is now no longer true. However, some caveats need to be applied. First, while Stats Canada doesn’t provide industry level breakdowns of employment type, the overall gain in employment was wholly driven by part-time jobs (+48.9k).

We think it is fair to assume that most of the part-time job gains were concentrated within wholesale and retail trade given how cyclically sensitive the sector is.

As such, a single-month uptick following a sustained downtrend in employment should be discounted as job gains can quickly be reversed. Second, strong employment gains in retail trade aren’t necessarily reflective of a rebound in consumer demand. If that was the case, we doubt job losses in accommodation and food services would have accelerated from an average pace of -2.766k in the fourth quarter to -30.3k at the start of the year.

Mixed messages weren’t only presented in the level and type of employment gains. January saw the unemployment rate fall for the first time since December 2022, dropping 0.1pp to 5.7% to defy expectations of a continued increase to 5.9%. In conjunction with stronger employment gains and still elevated levels of wage growth (5.3% YoY), the lower unemployment rate suggests that the loosening trend in the labour market has potentially ended at first glance. However, caution must once again be applied as the decline in the unemployment rate was primarily motivated by a drop in the participation rate as the total supply of labour barely changed in January, even as the overall population grew by 126k people. This curious dynamic led Stats Canada to investigate why the participation rate fell. The statistics agency found that the main increase in inactive workers came from an uptick in students over the past year (+172k from Jan23 to Jan24) and those declared ill, disabled, or to be volunteering (+132k). While over half of those inactive continued to be retired, it was notable that the pace at which this group grew significantly lagged.

Once again, this isn’t necessarily reflective of an economy that is growing at a strong pace and is inspiring early retirement. A better measure of the labour market, in our view, is the employment-to-population ratio. While not perfect, the steady decline in the measure highlights that measures like the unemployment rate are increasingly less representative of the aggregate economy and that growth is increasingly fuelled by less sustainable factors such as debt and migration as opposed to domestic consumption.

For the Bank of Canada, we think the argument to remain on hold at April’s meeting contrary to our base case is weak when looking directly at the headline data seeing as the details of today’s report paint a considerably softer picture. That said, the mixed messages and the need to read between the lines across all macro indicators now poses a substantial risk to our dovish BoC view, especially as central banks, led by the Federal Reserve, require “confidence” that inflation will track back to target before letting the genie out of the bottle with their first rate cuts. In terms of USDCAD, the market’s reduced confidence in the BoC’s easing cycle means the considerable upside adjustment towards 1.38 that we expect in the first quarter is becoming less likely.

That said, we think the economic backdrop isn’t yet conducive to turn bullish on the loonie, meaning USDCAD could well find itself stuck in a tight trading range around current levels until either the data cuts in a more definitive direction or the BoC provides firmer guidance.

USDCAD shakes off Canada’s stronger job gains as the details of the report read soft




Simon Harvey, Head of FX Analysis


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