There’s a perception out there that the economy is showing resilience against tariffs.
But the reality is the Canadian economy is barely showing a pulse despite moderate tax relief, the “Buy Canada” and “Travel within Canada” craze, and the prior aggressive interest-rate cuts engineered by the Bank of Canada.
Real GDP shrank by a modest 0.1 per cent month over month in May, and that was the third mild contraction in the past four months and took the year-over-year trend down to +1.2 per cent from +1.5 per cent a year ago and +1.7 per cent two years ago. Slowing and anemic, to be generous.
Even with Statistics Canada’s estimate that real GDP rebounded by 0.1 per cent month over month in June, that would still leave the level of real economic activity essentially the same as where it was at the turn of the year. Retail trade, air travel, manufacturing and construction remain fundamentally weak.
And while the immigration boom is over, the reality is that the 1.2-per-cent year-over-year growth in real GDP benchmarked against 2.3 per cent population growth (was 3.6 per cent a year ago) leaves the pace of economic activity in per capita terms still declining at more than a 1-per-cent annual rate.
Is this the “Canadian” definition of “resilience”? That is a sad state of affairs. It’s akin to a football team losing the game by two touchdowns but cheering on the fact that it beat the point spread.
One reason why there had been so many smiling faces at Bay Street economics departments was because of the ripping employment data we had been seeing of late in the Labour Force Survey (LFS) – until July, that is. This flied in the face of the dour mood the business sector is in, underscored by the most recent Bank of Canada survey of the firms. The outlook for sales and hiring is hardly constructive.
Those smiles may have turned to frowns on Friday with July’s jobs report. We’ll have to see if the person who heads up Statistics Canada is going to be summarily dismissed for having the temerity to publish one of the worst labour market reports of the past four years. Canadian employment as per the household survey tumbled 40,800, which made a mockery of the consensus forecast of a gain of 10,000 jobs.
This was destined to happen because the rival industry report, Survey of Employment, Payrolls and Hours, or SEPH, last week showed Canadian employment running nearly flat on a year-over-year basis (+0.2 per cent). The comparable from the Labour Force Survey, based on data up to the end of June, was +1.4 per cent. Over the past 30 years, the trends have on average lined up on top of each other – ergo, there may be more ‘payback’ ahead.
Making the details look worse than the headline Friday was the fact that full-time positions sagged 51,000 on the month. A pullback in the labour force, as immigration flows cool off (as they have south of the border), was the only reason the unemployment rate held at 6.9 per cent (consensus was 7 per cent). Had the participation rate not fallen to 65.2 per cent from 65.4 per cent, the jobless rate actually would have climbed to 7.2 per cent, which would have marked the highest level since July, 2021, when the Bank of Canada was pressing rates to the floor.
This was the steepest employment decline for any month since January, 2022. And the job level in the private sector fell 39,000 and has basically stagnated since the turn of the year.
That is all anyone needs to know about the Canadian economy – it may not be in a technical recession but is running as flat as an ice-hockey surface.
Adding insult to industry, the workweek shrunk 0.2 per cent so, in fact, the report was even worse than the headline suggested. As if it wasn’t bad enough.
Labour demand in Canada is on a visible downtrend and across a broad front, which is exerting downward pressure on wage trends. That, in turn, means that this recent upturn in the inflation data will hit a wall in the ever-loosening labour market.
The Bank of Canada is not likely to stay on the sidelines much longer, especially with the most interest-sensitive sectors of the jobs market contracting sharply in July and begging for additional rate cuts. And with that, the Canadian dollar will likely have more downside risk than any upside potential.
David Rosenberg is founder of Rosenberg Research.