OTTAWA—Despite a slight loosening of the labor market, Canada experienced a surge in employment in June, which is likely to pave the way for another interest rate increase when central bank policymakers meet next week.

Canada’s jobless rate ticked up for a second consecutive month as more individuals actively sought employment and the population continued to grow. However, hiring bounced back more strongly than anticipated, primarily driven by an increase in full-time work, thereby recovering from the previous month’s losses. This rise in employment suggests that a sharp economic slowdown is not imminent, contrary to what many economists predicted at the beginning of 2023 following the Bank of Canada’s decisive campaign to combat inflation by raising rates.

For many economists, the labor data unquestionably supports another one-quarter percentage point increase in the central bank’s policy rate on Wednesday.

According to Statistics Canada’s report on Friday, the number of employed working-aged individuals in Canada increased by 59,900 in June compared to the previous month. Simultaneously, the unemployment rate rose by 0.2 percentage points to 5.4%, which is the highest level since February last year. Consensus expectations projected a gain of 20,000 jobs and an unemployment rate of 5.3%.

In May, employment dipped by 17,300 jobs, primarily affecting the youth demographic. This followed a period of robust hiring since September of the previous year, which had maintained the jobless rate just above the record low of 4.9% reached in June and July.

When utilizing the U.S. Labor Department’s methodology, Canada’s unemployment rate in June was 0.2 percentage points higher at 4.4%.

Strong Employment Gains Expected to Spur Another Interest Rate Hike

The latest employment data for Canada has revealed strong gains, prompting expectations of another interest rate hike by the Bank of Canada. While the overall employment figures were positive, some areas, such as steady hours worked and wage growth, showed signs of weakness. However, economists believe that policymakers will overlook these shortcomings, considering them as temporary fluctuations.

According to Andrew Grantham, a senior economist at CIBC Capital Markets, the data is likely to be sufficient for policymakers to implement a 25 basis points interest rate hike next week. This is earlier than previously anticipated, as policymakers were expected to wait until September.

Despite a mixed picture painted by recent economic indicators, the general consensus remains that the Canadian economy is relatively resilient. This resilience has been evident even as the Bank of Canada continues to raise interest rates, with subdued growth expectations. In fact, just last month, the policy rate was increased by a quarter point to reach a 22-year high of 4.75%. This decision came after a brief pause in tightening measures due to strong consumer spending in the first quarter and concerns about inflation surpassing the 2% target.

While industry-level gross domestic product remained mostly unchanged in April, early indicators from Statistics Canada suggest solid month-on-month growth of 0.4% in May. Additionally, annual inflation in May showed a cooling trend at 3.4%, marking the slowest pace since mid-2021. However, elevated food prices still pose a concern. The housing market has seen a recovery in recent months, further fueling expectations of consecutive rate increases by the central bank.

Despite a slight increase in the unemployment rate by 0.2 percentage points in both May and June, the rate still remains below the pre-Covid-19 pandemic average of 5.7% in the year leading up to February 2020.

Jobs Report Shows Increase in Full-Time Employment

The latest jobs report for June reveals that all the jobs added during this period were in full-time employment, with a significant rise of 109,600 positions. This increase closely aligns with the overall growth of Canada’s labor force, which recorded a monthly increase of 114,000. However, there was a slight decline in part-time jobs, with a decrease of 49,800.

Employment among core-aged men between 25 and 54 experienced a 0.5% increase from the previous month. This brings the cumulative gain in employment for this group since March to 92,000. Conversely, the employment rate remained relatively stable among core-aged women, as reported by Statistics Canada.

Various sectors witnessed growth in employment, including wholesale and retail trade, healthcare and social assistance, and manufacturing and transportation and warehousing.

The labor-force participation rate, which measures the proportion of the working-age population that is either employed or unemployed, saw a slight increase of 0.2 percentage points from May to reach 65.7% in June.

One key indicator that the Bank of Canada has been monitoring for signs of inflationary pressure is average hourly wage growth. In June, this growth eased to 4.2%, following several months of growth above 5%.

There was negligible change in total hours worked compared to the previous month; however, there was a 2.0% increase compared to the same period last year.

Desjardins principal economist Marc Desormeaux suggests that based on the current vitality of the labor market and overall economic resilience, the central bank should consider another rate hike. He expects a quarter-point rise in interest rates next week and anticipates that the door will remain open for further increases.

Note: The original article provided contact information for Robb M. Stewart, which has been omitted.

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