Canada’s unemployment rate hits 6.6% in August: economic slowdown continues to weigh heavily

Unemployment rate rises to highest level since 2016

Canada’s unemployment rate increased to 6.6% in August, marking a sharp rise from earlier in the year when the rate was lower by 1.6 percentage points in January 2023. According to Statistics Canada, this surge in unemployment has not been seen in over seven years, excluding the unique circumstances of 2020 and 2021 when the global pandemic had a profound impact on employment.

While the addition of 22,100 jobs in August provided some relief, it did not meet the expectations of analysts, who had forecasted a net job increase of 25,000. Furthermore, the fact that all job gains came from part-time employment indicates a less-than-robust recovery in the labor market. This has left many Canadians, particularly younger workers, in a precarious situation.

Youth unemployment sees alarming spike

The rise in unemployment has disproportionately affected Canada's youth, with the age group of 15 to 24 years experiencing the largest year-over-year increase in joblessness. The summer of 2023 saw the highest unemployment rate among this group in eight years. Young workers often face more volatility in the labor market, and the current economic slowdown has exacerbated this trend, putting further pressure on their job prospects.

This youth unemployment crisis could have long-term effects on the Canadian labor force, as young workers are key to the country’s future economic stability. High levels of joblessness among young people could hinder their ability to gain experience, leading to a less skilled workforce in the long run.

High interest rates stifling economic growth

Canada’s economy has been grappling with high interest rates, which have slowed down economic activity. The Bank of Canada’s key policy rate now stands at 4.25%, following a third consecutive rate cut of 25 basis points in an effort to support growth. However, these measures have not been sufficient to prevent the rise in unemployment, and some economists have expressed concerns that further rate cuts may be necessary to boost the economy.

Governor of the Bank of Canada, Tiff Macklem, acknowledged that more substantial rate reductions could be implemented if the economy continues to underperform. He noted that slow employment growth is one of the factors that could undermine GDP projections for the third quarter of 2023. Financial markets have responded by lowering their expectations for further rate cuts in October, though traders are still fully pricing in two additional 25 basis point rate cuts by the end of December.

Slowing wage growth raises inflation concerns

Another factor contributing to Canada’s economic challenges is the slowdown in wage growth. Statistics Canada reported that the average hourly wage growth of permanent employees fell to an annual rate of 4.9% in August, down from 5.2% in July. Although wages have been growing, this slower pace is partly responsible for maintaining high inflation rates, a concern that the Bank of Canada closely monitors.

The Bank of Canada has emphasized that wage growth needs to be carefully controlled to avoid exacerbating inflationary pressures. However, with inflation still a concern, wage growth remains a critical point of focus as policymakers balance the need for economic stimulus with efforts to keep prices stable.

Employment rate continues its decline

Beyond the unemployment rate, the overall employment rate in Canada—defined as the proportion of the working-age population with jobs—has been on a steady decline. In August, this rate dropped to 60.8%, continuing a downward trend seen in 10 out of the past 11 months. This decrease reflects the broader difficulties faced by the Canadian labor market as population growth outpaces job creation.

The employment rate is a critical measure of labor market health, as it provides a clearer picture of the percentage of the population that is actively engaged in the workforce. The current decline signals that even as the population grows, the economy is not generating enough jobs to keep up, resulting in a shrinking share of employed individuals.

Economic outlook: recession fears loom

Canada’s economic outlook remains uncertain, with fears of a potential recession growing as unemployment rises and GDP growth continues to lag behind population growth. Economists have raised concerns that the combination of high interest rates, slow job creation, and inflation could push the country into a more pronounced economic downturn.

While the Bank of Canada has taken steps to mitigate these risks by cutting interest rates, the effectiveness of these measures remains to be seen. Further rate cuts may be necessary to spur growth, but there are concerns that this could exacerbate inflationary pressures, creating a delicate balancing act for policymakers.

Canada's rising unemployment rate, particularly among younger workers, is a clear indicator of the economic challenges the country faces. The slow pace of job creation, coupled with high interest rates and inflation concerns, has created a difficult environment for both workers and policymakers. As the Bank of Canada considers further rate cuts to stimulate growth, the focus must also remain on addressing the underlying causes of unemployment and ensuring that wage growth and inflation remain manageable. The coming months will be critical for the Canadian economy as it navigates these complex challenges and seeks to avoid a potential recession.

source: CTV News