The Canadian economy seems to be ganging-up on the Bank of Canada as it tries to wrestle inflation back to 2.0%.

The latest employment numbers, once again, came in well above expectations.  Statistics Canada reports 35,000 jobs were created in March, nearly triple what had been forecast.  As a result of the on-going demand from workers, wage increases have also caught up to inflation.  Wages are up 5.3% from a year ago.

“A lot of employers say they’ve been having trouble finding workers, and what do you do? You bid up your offer and that tends to drive wages up,” said Pedro Antunes, chief economist with the Conference Board of Canada in an interview with the CBC.

It’s good news for workers, but it makes things harder for the central bank which has been trying to avoid outsized wage growth because it is seen as a driver of inflation.  Wages tend to be “stickie”, in that they only go up, unlike prices for commodities and services which can decline based on supply and demand.

“I don’t necessarily think that’s bad news, but … we’re in this kind of bizarre world where sometimes the good news is not so good news for the Bank of Canada,” said Antunes.

This follows stronger than expected January GDP numbers.  The economy grew 0.5% for the month, defying the BoC’s efforts to slow things down.  However, the Bank is expected to continue its rate-hike pause at this week’s setting, as it waits for last year’s rapid series of increases to work their way through the economy.

Published by First National Financial LP

The latest numbers from Statistics Canada show the country’s economy continues to chug along despite very deliberate efforts to slow it down.

Gross Domestic Product (GDP), which measures the total value of all goods and services produced by the economy, rose by 0.5% in January.  Early indications are it was up by another 0.3% in February.  The first quarter of this year is on track to see GDP grow at an annualized rate of 2.5%.  The Bank of Canada had forecast growth of about 0.5%.

The unexpected resilience of the Canadian economy is buoying hopes for a, so-called, “soft landing” as the BoC works to bring inflation down.  There have been numerous forecasts that say the central bank’s rate hiking policy will push Canada into recession and unemployment will rise.  Some of those predictions are softening and the fear of significant job loses is fading.  But analysts still expect there will be an economic slowdown and, perhaps, a mild recession later this year as the effects of the Bank’s rate hikes work their way through the overall economy.

The BoC has paused its rate increases, for the time being.  But it has made it clear more hikes will come if they are deemed necessary.  The Bank’s trend-setting policy rate is now 4.5% and inflation has dropped to 5.2%.  The Bank expects it to fall to 3.0% later this year.  Target is 2.0%.

If economic growth remains stronger than expected and high inflation persists the BoC could be forced into the tough position of having to raise interest rates at the risk of pushing the country into a real recession.  In others words, a “hard landing”.

For now, the Bank is expected to leave its rate unchanged at the next setting on April 12^th.

The current wave of economic uncertainty does not seem to be drowning Canadians’ optimism about the housing market.

The annual Canadian Real Estate Industry Trends Report from Re/Max suggests nearly one-third (32%) of Canadian home buyers and sellers have a positive sense that the market could become more balanced this year.

There are, of course, concerns.  Inflation and the cost of living weigh on the minds of 34% of Canadians.  Closely related to that, 25% are worried about housing affordability, according to the report.

Affordability has become a persistent source of anxiety even though the analysts continue to predict ongoing home price declines.  The latest report from Fitch, the global credit rating agency, is forecasting a further 5% to 7% drop in Canada.  Despite that, Fitch says prices remain 20% above pre-pandemic levels and are likely to remain elevated because of high demand and low supply.  Separately, higher interest rates have been a key factor in lower affordability.

There have been suggestions that the affordability problem may be exacerbating itself.  Canada Mortgage and Housing Corporation recently reported a 13% decline in housing starts between December 2022 and January 2023.  At least some of that is thought to be the result of developers putting projects on hold until market conditions improve.

The Re/Max report indicates two-thirds of Canadians believe governments should take action to address affordability and supply issues.  It also suggests 22% of Canadians would like to see new building that fills in the, so-called, “missing middle” in the country’s housing market.

The latest piece of hard economic data has market watchers looking to see how the Bank of Canada will react.

The January employment numbers show the economy added a stunning 150,000 jobs.  That is 10-times what was forecast and is the second out-sized reading in a row.  December saw a downwardly revised total of 69,000 new jobs.  The unemployment rate remains at a near record low of 5%.

The job numbers indicate Canada’s economy remains strong and continues to face inflationary pressures.

Markets and investors reacted almost immediately, reversing their expectations of a probable rate cut this year, to forecasting another rate hike in the coming months.  But many analysts say that may be pre-mature.

The BoC has put a “conditional” pause on further increases, giving itself some “wiggle room” so it does not have to respond to any, single, data point, regardless of how strong it is.  And there are indications the Bank’s rate hikes over the last year are starting to catch up to the broader economy.

The central bank’s recent Business Outlook Survey indicates that hiring plans have been reduced and wage growth is slowing.  While job postings are still 50% above pre-pandemic levels, wage increases have come down in recent months, slipping to 4.5% in January from 4.7% in December.

In general, analysts say the hikes are still gradually flowing through to household and business debt payments.  They expect demand will erode, pushing unemployment higher through the end of the year.