Canada’s current job market stands out for its remarkable resilience. Yesterday, we learned that in July, the unemployment rate fell to 6.9%, a decrease from 7%. This drop comes against the backdrop of a relatively tepid overall job growth forecast. A widely expected spike in the unemployment rate is just around the corner. The resilient Canadian economy may be continuing to add jobs, but the pace is decidedly slower. The upcoming Canadian Labour Force Survey report, set to be released on Friday at 12:30 GMT by Statistics Canada, will provide further insights into the current employment landscape.
The value of the Canadian Dollar is heavily influenced by the state of the U.S. economy. This currency is the lifeblood of Canada’s financial landscape. As the world’s second-largest trading partner, fluctuations in the U.S. economy can have immediate effects on Canada’s financial situation. Petroleum is currently Canada’s biggest export. So it’s not surprising that the value of the Canadian Dollar can be highly affected by changes in oil prices.
In recent months, growing inflationary pressures have alarmed economists and policymakers alike. The Bank of Canada generally aims for a specific core inflation rate close to 2%. If inflation moves substantially above this target, central banks tend to react. Such situations require action by central banks, which usually need to raise the base lending rate to stabilize prices. Recent Consumer Price Index (CPI) figures have revealed that price pressures are building across the Canadian economy. This increase will raise important questions for future monetary policy decisions.
Job Creation Slows but Remains Positive
In July, the rebound in Canada’s job market showed signs of slowing down compared with previous months, but still marked continued job growth. Sluggish job growth reflects the tough economic realities all Americans are experiencing. It’s a sign that the labor market is dynamic and responsive. This stability comes as employers continued to hire in almost every sector, which is helping to push down the unemployment rate ever so slightly.
Even with this encouraging news on jobs, there is still much doubt about where future growth will come. Economists predict that while some job opportunities will arise, the overall pace may not be sufficient to keep unemployment from rising again in the coming months. The new twin threat of a contracting economy combined with rising inflation further muddies future employment prospects.
You’d be mistaken—at least given recent Gross Domestic Product (GDP) data, which indicate that Canada’s economy actually shrank in May. This contraction deepens worries about the nation’s economic malaise. In positive news, analysts predict a modest expansion in Q2—in spite of continuing inflationary pressures. This patchy economic performance has further created an inflationary environment that makes job growth and declining unemployment rates in Canada difficult, if not impossible to sustain.
Inflationary Pressures and Currency Impacts
Inflation has become an acute concern for Canada’s economy, as July’s complete CPI numbers show accelerating overall price pressure. The Bank of Canada’s overall mandate is to maintain price stability, a challenging task under our ongoing inflationary situation. The inflation indices suggest that inflation is rising towards and even exceeding that 2% target. This has led to unprecedented speculation around a possible cut to the base lending rates.
Rising inflation’s effect could not be timelier when it comes to the Canadian Dollar. There is a very strong inverse correlation between inflationary trends and currency value. The Canadian Dollar experienced a reversal from late June and early July lows, finding significant support as market participants reacted to economic indicators.
The USD/CAD currency pair returned sharply after peaking at two-month highs just under 1.3900. The move came right on the heels of last week’s dismal U.S. Nonfarm Payrolls report. Examining the relationship between important Canadian and U.S. economic indicators illustrates the depth of integration between these two economic powerhouses. The nature of their future impact on one another may be very large.
Anticipation for Upcoming Labour Force Survey
All stakeholders would be interested to know what the July’s Canadian Labour Force Survey report brings. The President and advocates have understandably high hopes for its positive effect on the job market and the greater economic outlook. This report will be the first of many, shedding light on employment trends. At the same time, it will show how effectively Canada is addressing its present economic difficulties.
Analysts are quick to point out that the news is mostly good. In particular, unemployment is in decline. They note it’s equally important to look at job creation and general economic performance. The impact of inflationary pressures and employment rates will be crucial to the Bank of Canada’s future decisions. Make no mistake, these factors will be key drivers of monetary policy decisions.