Canadian wage growth picked up in February and surpassed 5 per cent, a potential setback for the Bank of Canada as it tries to subdue inflation and a rollicking labour market.
On an annual basis, average hourly wages rose 5.4 per cent to $33.16, an acceleration from the 4.5-per-cent pace in January, Statistics Canada said Friday in a report. Financial analysts were expecting wage growth of 5.1 per cent. To an extent, the numbers were influenced by the comparison to February, 2022, when lower-paid service workers were rehired after COVID-19 lockdowns, pushing down average pay that month.
While workers are benefiting from tight labour market conditions, Bank of Canada officials have repeatedly said that wage growth will need to subside and unemployment will need to rise for the central bank to tamp down inflation, last measured at a 5.9-per-cent annual rate.
Thus far in 2023, the labour market is forging ahead. Employers added around 22,000 positions in February, according to Friday’s report, after a blockbuster gain of 150,000 jobs in January. The unemployment rate held steady at 5 per cent, close to an all-time low.
“Arriving on the heels of the January jobs jamboree, this result is far too strong for the BoC’s comfort,” Bank of Montreal BMO-T chief economist Doug Porter said in a client note. “There simply is no sign that the labour market is succumbing whatsoever to the rapid-fire tightening of the past year.”
Earlier this week, the Bank of Canada held its policy rate at 4.5 per cent, a pause that it had telegraphed after eight consecutive rate hikes that began in March, 2022. Still, the central bank has kept the door open to additional rate increases if inflation doesn’t ease as expected.
The bank’s latest Monetary Policy Report, published in January, said that wage growth “appears to have plateaued” at between 4 per cent and 5 per cent and was no longer rising.
There are several ways of measuring wage growth across multiple Statscan reports. They generally show that wages are rising at more than 4 per cent on an annual basis.
Bank of Canada officials have argued that the current pace of wage growth is not compatible with bringing inflation back to the 2-per-cent target, unless there is strong pickup in productivity.
However, labour productivity – as measured by real gross domestic product per hour worked – has fallen for three consecutive quarters. Put another way, employees are producing fewer goods and services per hour of work. To compensate for less output and rising labour costs, many companies will charge their customers higher prices.
“Productivity growth is a good thing for the economy because it allows businesses to pay for higher wages,” Carolyn Rogers, senior deputy governor at the central bank, explained on Thursday in a speech. “If we continue to see the above-average wage growth that we’ve been seeing in Canada without stronger growth in productivity, it will be difficult to bring inflation all the way down to 2 per cent.”
Ms. Rogers later added: “Productivity isn’t trending in the right direction so far.”
The central bank has said it will need to see an “accumulation of evidence” of an overheating economy before it raises rates again. Economists and investors generally don’t think that threshold has been met.
Interest rate swaps, which capture market expectations of future rate decisions, are indicating that the benchmark interest rate will remain at 4.5 per cent through the end of the year. Traders are placing slimmer odds on rate hikes than they were on Thursday. BMO’s Mr. Porter tied the shift in interest-rate expectations to the collapse of Silicon Valley Bank and broader fears that have swept through financial markets this week.
Also on Friday, the U.S. reported a gain of 311,000 jobs in February, which was higher than analyst estimates. Wage growth slowed on a monthly basis.
In Canada, full-time employment rose by around 31,000 positions in February, helping to boost the number of hours worked that month by 0.6 per cent. The labour data suggest Canada is heading for positive economic growth in the first quarter; last year, many analysts on Bay Street had predicted a recession would be under way by now.
“It’s still a question of whether we have a formal recession or not,” said Toronto-Dominion Bank TD-T chief economist Beata Caranci. She noted, however, that “it’s really hard to imagine a situation where you can get inflation floating back down to 2 per cent with the unemployment rate being this low.”