Canadian economy observers brace for weak jobs numbers, call for rate cut

theglobeandmail.com
July 6, 2015
By Sean Silcoff

The Canadian jobs picture has looked like a roller-coaster ride of late - one month up, one month down. After an unexpectedly strong up month in May, economists are bracing for a flat or down report for June from Statistics Canada this Friday. Will the report be accompanied by screams? If so, they will likely be even louder calls for another interest rate cut by the Bank of Canada this month.

After Statistics Canada reported that the Canadian economy added nearly 59,000 jobs in May - one of the strongest showing in recent years - economists are calling for a drain of as many as 20,000 jobs in June, and a slight increase in the unemployment rate, to 6.9 per cent from 6.8 in May. “Given the volatility, it will be a weak number,” said Benjamin Tal, deputy chief economist with CIBC World Markets Inc. “Something close to zero or even negative 10,000. ... I really don’t think we can retain this strong rate of employment” from the previous month.

The reason is that last month’s jobs figure was out of step with broader trends, namely overall economic performance: The monthly gross domestic product has been down each of the past four months and five of the past six, including a disappointing 0.1-per-cent decline in April (the most recently released figures, out last week) and downward revisions to earlier monthly figures from 2015.

Given the economic impact of forest fires in Alberta in May and the unlikelihood of a robust rebound across the country that month and June, “a technical recession” - as in, two successive quarters of declining output - “is a real possibility,” Mr. Tal said in a note to clients Friday. Maybe technical, but not “a sustained, broad-based decline in economic activity,” Douglas Porter, chief economist with Bank of Montreal, told his clients Friday. “Canada simply doesn’t meet [the] test” of being in a recession, he said, given that auto and home sales are booming, home building is robust and the bad news is concentrated in resources and the two provinces most heavily weighted to that sector, Alberta and Saskatchewan.

Meanwhile, the jobs figures have risen in six of the past 12 months and fallen the other six, including a back-and-forth pattern for the past six. “Its been all over the map,” Mr. Porter said. “It suggests to me we shouldn’t totally trust the month-to-month moves,” which suggests “the economy is struggling to grow on a consistent basis.”

Indeed, 12-month comparisons show more consistency: Employment in Canada over the one year through May increased by 192,000 jobs, or 1.1 per cent; Canadian GDP from April, 2014, to April, 2015, rose by 1.2 per cent. Growth around 1 per cent is hardly inspiring - it’s one of the weakest performances by the Canadian economy outside of recession periods we’ve seen, Mr. Porter said in an interview.

The picture south of the border is different: The U.S. continues to chug along, creating more than 200,000 jobs in May, while consumer confidence, home and auto sales are looking rosy. GDP growth for the year is expected to range at a steady clip of between 2.5 per cent and 3 per cent, IHS chief economist Nariman Behravesh said this week. Wage growth is lagging and the rate of people working is at its lowest level in nearly 40 years, but the overall picture is robust enough that most economists continue to expect the U.S. Federal Reserve to start boosting interest rates this fall.

Not so in Canada. The jobs announcement this Friday is the last piece of data during a busy week that will produce most of the remaining puzzle pieces that the Bank of Canada Governor will need in place before deciding what to do with interest rates in mid-July. Monday will see the release of the Bank of Canada’s key Business Outlook Survey and Senior Loan Officer Survey, which will offer the latest views on borrowing, investing and hiring intentions by the private sector; the latest data on building permits, housing starts and the merchandise trade balance during the week will fill out the picture.

Economists are now expecting two things from the Bank of Canada: That it will ratchet down its call from April for 1.9-per-cent growth in GDP for the year - a figure that Capital Economics said last week “now looks utterly unrealistic” - and that it will cut interest rates, likely by one-quarter of a percentage point. With oil and other commodities prices still in a slump, uncertainty in Europe over the Greece situation, growing concerns about China and muted consumer spending in Canada clouding the picture, “we don’t have too many engines working toward job creation,” Mr. Tal said.