Unemployment rate rises for the 1st time since August amid 'cracks' in job market

WATCH: The unemployment rate rose for the first time since August 2022, up from 5.0 per cent in April.

Canada’s unemployment rate rose to 5.2 per cent in May, Statistics Canada said Friday, a sign of weakening in the country’s tight labour market that will help inform the Bank of Canada’s future interest rate decisions.

Employment overall was little changed in the month, the agency said, with a modest 17,000 jobs lost. Employment fell among youth aged 15-24 and rose among those aged 25-54.

While part-time employment rose to the tune of 15,500 jobs in May, Canadian employers collectively cut 32,700 full-time positions, according to the report.

The unemployment rate rose for the first time since August 2022, StatCan said, up from 5.0 per cent in April.

“Today’s negative print ends a streak of eight months of job gains,” said TD director of economics, James Orlando in a client note.

“The question is now: Is this a one-off or the start of a trend? The labour market had been defying gravity for months and was bound for some giveback.”

The jobs report comes after the Bank of Canada’s decision this week to raise its key interest rate target by a quarter of a percentage point to 4.75 per cent.

In raising its key rate, the central bank said the labour market remains tight, reflecting continued strong demand for workers.

But economists reacting to the latest jobs data say the Bank of Canada will need more than one relatively weaker job report to back off of rate hikes. In fact, many of them are expecting the central bank to move ahead with another rate hike in July.

“Some cracks appeared within the Canadian labour market in May, but these may not yet be wide enough to convince the Bank of Canada that inflation is about to meaningfully cool off,” said CIBC senior economist Andrew Grantham in a note to clients Friday morning.

He suggested the weaker jobs figures might see markets scale back expectations of additional rate hikes to come, but the Bank of Canada’s policymakers may need to see “further softening” to convince them they can leave rate unchanged.

“If 425 basis points was not enough to slow things down, is another 25 basis points going to be the straw that breaks the camel’s back? That’s kind of hard to believe,” said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist.

Earlier this year, the central bank paused its aggressive rate-hiking cycle that began in March 2022. The Bank of Canada was hoping its rapid monetary policy tightening would be enough to stifle inflation.

But the economy has proven to be more resilient this year than it had expected. Employers have continued to hire, consumers are spending more and the economy is growing.

Reitzes says the full effect of rate hikes have yet to filter through the economy, but even with that taken into account, the central bank is likely nervous that high inflation is pushing up inflation expectations among consumers and businesses.

“If you don’t act more forcefully to bring down growth in a more timely manner, you run the risk of having inflation expectations stay higher,” Reitzes said.

Although the job market hasn’t slowed enough for the central bank’s liking, Statistics Canada noted in its report that job growth has moderated in recent months. It says monthly job gains between February and April averaged at 33,000. That follows the economy adding more than 300,000 jobs cumulatively between September and January.

In May, fewer people were working in business, building and other support services as well as professional, scientific and technical services last month. Meanwhile, employment rose in manufacturing, other services and utilities.

Average hourly wages were up 5.1 per cent in May, continuing to outpace inflation. The Bank of Canada has said this was one of the metrics it would be watching closely, arguing that wage growth in the four to five per cent range is incompatible with a two per cent inflation target.

— with files from The Canadian Press

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