Growing angst about the sluggish pace of job creation could provide more cover for the Bank of Canada to lower interest rates again.
Carolyn Wilkins, Governor Stephen Poloz's top deputy, warned in a speech Tuesday that the economy is still 270,000 jobs short of full employment, weakness that is weighing on a country already grappling with the oil price collapse.
"We don't want to inadvertently stifle the rebuilding phase of an economy that will need to adjust to the lower price of oil," she told the Ottawa Economics Association.
The economy generated an average of 10,000 new jobs a month in 2014, or roughly 3,500 less than it should at this stage in the recovery, according to the Bank of Canada.
The central bank took financial markets by surprise on Jan. 21 when it lowered its key interest rate to 0.75 per cent from 1 per cent. Most economists now expect the bank to cut its overnight rate at least another quarter percentage point by April. Its next rate-setting meeting is set for March 4.
"Look for another rate cut in March, and don't count out further easing," Bank of Montreal senior economist Benjamin Reitzes said in a research note.
Toronto-Dominion Bank economist Randall Bartlett said the central bank is "looking to the labour market for guidance in setting the path of monetary policy."
The Canadian dollar extended its losses after the mainly downbeat speech. The dollar closed Tuesday at 79 cents (U.S.), down one cent.
The jobless rate, now at 6.5 per cent, doesn't reflect the full extent of labour weakness. The unemployed are staying unemployed precariously long – 21 weeks on average – a quarter of part-time workers would like to be working more and wage increases are "subdued," Ms. Wilkins pointed out.
"There are currently no inflation pressures coming from the labour market over all," she said.
The central bank has struggled to explain its recent rate move. Most analysts had long assumed that the Bank of Canada's first move after a nearly five-year period of inaction would be to raise its overnight rate later this year, or in early 2016.
Ms. Wilkins explained that last month's rate cut has eased monetary conditions by "affecting the full range of asset prices." She called this "a normal transmission of monetary policy" that will ease the economy's transition out of oil-fueled growth and investment.
A 50-per-cent plunge in the price of oil since June changed the bank's thinking. The lower return on Canada's oil exports will knock 4.5 per cent off gross domestic income between now and the end of 2016 and cause companies to invest less, particularly in the oil patch, Ms. Wilkins pointed out.
Ms. Wilkins acknowledged the upside to lower oil prices, including a weaker Canadian dollar and the strengthening U.S. economy. But she said these benefits will "take longer to materialize and are uncertain."
The negative effects of cheaper oil, on the other hand, "happen swiftly," she said.
Low oil prices, if they persist, will force workers to move from west to east, and out of the oil and gas industry into other sectors, she said. "There will be some adjustments across the country as non-energy exporters take on the mantle of growth," Ms. Wilkins pointed out.
Ms. Wilkins had been slated to deliver a speech in Calgary Jan. 27 on "oil, jobs and growth." That event was cancelled by organizers, and the bank announced just a day before its rate-cut move that Ms. Wilkins would instead speak in Ottawa.