Canada Job Losses Double Expectations as Omicron Slows Economy
Canada’s economic growth sputtered in January, revealing a concerning contraction in the labour market, as the Omicron wave of COVID-19 continued to impact economic activity. Statistics Canada’s January Labour Force Survey unveiled a significant drop in hours worked and a surge in joblessness, far exceeding expectations and signaling a potential slowdown in the nation’s economic momentum. The numbers presented a stark contrast to the robust gains witnessed in previous quarters, indicating that the recovery from the pandemic was facing new headwinds.
The survey revealed a notable decline in hours worked, with a contraction of 2.2 per cent from December’s rebound. This decrease in working hours reflects a substantial reduction in economic activity, highlighting the disruption caused by the latest wave of the virus. The contraction represents a clear warning sign, as it interrupts the positive economic trends that had been building throughout the latter half of 2021. Adding to this, the unemployment rate jumped to 6.5 per cent from 6 per cent, and employment dropped by 200,000 positions, more than most Bay Street forecasters were expecting.
The alarming job losses were largely a response to the ongoing restrictions imposed on businesses, particularly in the hospitality, arenas, and other high-touch sectors. Provincial governments, grappling with the spread of the highly contagious Omicron variant, reintroduced measures to manage the pandemic. These restrictions, primarily focused on limiting the transmission of the virus, ultimately impacted overall economic growth and contributed to the decline in employment figures. The numbers confirmed anecdotal evidence of the impact of these measures.
The Bank of Canada had previously estimated that Gross Domestic Product (GDP) grew at an annual rate of almost six per cent in the fourth quarter, but acknowledged the fifth wave of Coronavirus infections will probably cause growth to slow to two per cent this quarter. The unemployment rate was hovering around 5.5 per cent in 2019, and yet inflation was benign, suggesting it might be possible to run the economy hotter than the Bank of Canada has thought in the past. Governor Tiff Macklem initially thought he might leave borrowing costs unusually low until the unemployment rate returned to that level. But as inflation took off, policy-makers decided it would be too risky to test the limits of their understanding of full employment. Macklem and his deputies made it clear last week that they will quite likely decide to lift interest rates next month.
Statistics Canada offered some positive news on the inflation front. It said average hourly wages grew 2.4 per cent from January 2021, compared with year-over-year gains of 2.7 per cent in the previous two months. That could suggest inflation hasn’t yet affected wage demands, an important indicator of whether the current burst of price increases will fade or become persistent. “The job losses and rise in the unemployment rate were expected by Bank of Canada and do not change its view of the economy,” said Charles St-Arnaud, a former Bank of Canada economist who now is chief economist at Alberta Central. Both St-Arnaud and Clark said they still expect Macklem and his deputies to raise the benchmark interest rate at the end of their next round of policy deliberations on March 2.
The Canadian labour market showed impressive ability to rebound after previous waves last year, and some of the prevailing conditions that helped the recovery, like elevated employer hiring appetite, remain. Progress should get back on the right track, but will require ongoing positive economic momentum to sustain it. Some economists wondered ahead of the report if the employers most affected by the lockdowns would keep employees on the payroll, rather than risk losing them during a period of extreme competition for workers. That doesn’t seem to have happened. The drop in employment was nearly double the Bay Street consensus.
Ultimately, the January data underscores the challenges facing the Canadian economy. While the initial recovery from the pandemic had been remarkably strong, the latest wave of COVID-19 is proving to be a significant headwind. The Bank of Canada’s primary concern now is inflation, which is running at its fastest rate in more than three decades. The data will likely accelerate the central bank’s plans to increase interest rates, further tightening monetary policy and potentially adding to the economic slowdown.
