The pace of Canadian wage growth suggests there’s still “some slack” in the country’s labour market despite an economy running at close to full capacity, Bank of Canada deputy governor Sylvain Leduc said.
However, in a speech following up on Wednesday’s interest-rate decision by the central bank, Mr. Leduc presented an upbeat view of the Canadian economy and confirmed that growth still looks on track to meet the bank’s April forecast for the first half of the year of about 2 per cent annualized.
“Overall, the data we have received since April support our near-term projection,” Mr. Leduc told an audience in Quebec City.
He spoke just hours after Statistics Canada released gross domestic product figures showing first-quarter growth of 1.3 per cent annualized – matching the central bank’s April estimate but disappointing many economists, including those at the Bank of Canada. On Wednesday, the bank had said it believed first-quarter growth had been “a little stronger than expected.” But while the report showed a generally tepid quarter, it also indicated that the economy picked up momentum as the quarter progressed.
“The data has been really encouraging,” Mr. Leduc said in a press conference following his speech. “What we’ve seen today, in terms of the [GDP] numbers, are really reassuring for us, reinforcing our views that the economy is evolving as expected.”
“We saw some weak data at the beginning of the year, but the tenor of the more recent data has improved,” he said in his speech.
However, Mr. Leduc said that although wage growth “has strengthened considerably” since its lows of mid-2016, “wages are rising somewhat more slowly than we would expect to see in an economy operating at capacity.”
The Bank of Canada’s “wage-common” measure, designed to gauge broad underlying wage trends while filtering out volatility, was up 2.6 per cent year-over-year in the first quarter – below the roughly 3 per cent that would be typical with an economy at full employment and inflation near the bank’s 2-per-cent target.
“This may indicate that some slack remains” in the labour market, he said – even though the economy’s output is essentially at full capacity and businesses are increasingly reporting labour shortages.
One piece of evidence of this slack, he said, is that the share of Canadians who have been unemployed for more than six months “remains significantly higher than it was before the Great Recession.”
Another possibility, he suggested, is that workers “may be more reluctant now to ask for bigger raises, even when the economy strengthens.” He said this could reflect the insecure employment landscape that emerged from the financial crisis of 2008-2009 and the subsequent oil shock of 2014-2015, and the growing concerns about automation and outsourcing.
He said that Bank of Canada research suggests that with the Canadian economy growing only marginally above the growth of its potential output, a significant further acceleration in wage growth may be unlikely.
“In the past, when the economy was operating only slightly above its potential, wage growth did not increase substantially,” he said.
In his post-speech press conference, Mr. Leduc said it’s “too early to tell” what impact the new U.S. tariffs on Canadian steel and aluminum imports, and Canada’s announced dollar-for-dollar retaliation on imports from the United States, might have on the Canadian economy.
“These have just been introduced. We’ll have to analyze and see what’s happening on the ground – look at the data, how it evolves over the next few months,” Mr. Leduc said.
“For a small, open economy like Canada, where trade is important, those measures are not the type of measures that are conducive to a good environment,” he said. “This is a risk that we have highlighted in our Monetary Policy Report in the past – the risk of protectionism and the fear of the tit-for-tat responses.”