Those who think that a bad economy eventually will force the Bank of Canada to reduce borrowing costs are feeling better about their bet after Statistics Canada reported Friday that Canadian employers dropped 30,400 workers in July.
"All things considered," David Madani of Capital Economics told clients in a note, "this jobs report provides further support to our long-held view that the Bank of Canada may eventually be forced to cut interest rates."
Mr. Madani's analysis assumes policy makers will focus on the headline number, which suggests that Canada's economy has slid into a soft patch, as job creation was paltry in May and June. The unemployment rate rose to 7.3 per cent in July from 7.2 per cent the previous. Canada now has lost an average of about 5,000 jobs over the past three months.
The big drop in employment surprised economists. According to surveys, Bay Street and Wall Street analysts were expecting a modest gain of about 6,000.
But was the result a shock for the central bank? Chances are it wasn't. The jobless survey is extremely volatile, producing unexpectedly large increases earlier this year. Year to date, the economy has generated an average of 17,800 jobs per month, a figure the Royal Bank of Canada's Mark Chandler says is in line with the Bank of Canada's outlook for modest economic growth of 2.1 per cent this year.
However, deeper within Statscan's jobs data, there is a figure that could get the Bank of Canada's attention. Policy makers keep an eye on changes in the average hourly wage rate of permanent employees to gauge whether inflation pressure is building. That number jumped 3.9 per cent in July from a year ago, to $24.49, the fastest since April, 2009.
Bigger wages will support consumer demand. But all things equal, any increase in purchases will put upward pressure on prices. "This…could be a source of concerns for the Bank of Canada if it proves persistent," Nomura's Charles St-Arnaud, a former Bank of Canada economist, said in his analysis of Friday's jobs report.
The Bank of Canada has left its benchmark rate at 1 per cent since September 2010, providing a cushion from economic and financial turmoil abroad. Eventually, borrowing costs that low will spark inflation. If that's already happening, the last thing the central bank will want to do is fan the flames. Economic conditions will have to turn very bad to prompt Governor Mark Carney to shift course and provide more stimulus.