Canada’s labour market unexpectedly lost jobs and the unemployment rate jumped to the highest level in more than two years, signalling greater slack in the economy that will test the central bank’s patient stance on rate cuts.

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The country shed 2,200 jobs in March and the unemployment rate rose 0.3 percentage points to 6.1 per cent, Statistics Canada reported Friday in Ottawa. The figures missed expectations for a gain of 25,000 positions and a jobless rate of 5.9 per cent, according to the median estimate in a Bloomberg survey of economists.

This is the first job loss since July and the highest unemployment rate since January 2022. Outside of the COVID-19 pandemic, Canada hasn’t had a jobless rate above six per cent since 2017.

United States data released at the same time showed the country added 303,000 jobs in March, beating estimates. After the reports, the Canadian dollar saw its largest intraday drop in two weeks and was trading at $1.3623 per U.S. dollar at 8:40 a.m. in Ottawa. The yield on the benchmark Canada two-year bond slipped, down about two basis points on the day at 4.16 per cent.

The Canadian data highlight growing weakness in the job market that will likely add to evidence that the Bank of Canada may need to soon start considering interest rate cuts. March’s job losses, following a slower pace of hiring than population gains over the past few months, may help convince policymakers that there are enough forces to keep inflation on a sustained downward path to the two per cent target.

“The cracks that had been emerging within the Canadian labour market suddenly got a lot wider,” Andrew Grantham, economist at Canadian Imperial Bank of Commerce, said in a report to investors.

“While markets had been pushing back expectations for a first Bank of Canada interest rate cut following strong GDP data to start the year, today’s labour force data should see them pulling those expectations forward again closer in line to our expectation for a first move in June.”

The cracks that had been emerging within the Canadian labour market suddenly got a lot wider

Andrew Grantham, economist, CIBC

Last month, governor Tiff Macklem and his officials held their key policy rate steady at five per cent for a fifth straight meeting, acknowledging progress on inflation while reiterating that it’s “too early” to consider easing. Macklem said there were signs wage pressures may be cooling as labour markets have continued to loosen gradually.

This is the last of two job reports before the next Bank of Canada rate decision on April 10, when policymakers will also update their forecasts. Economists in a Bloomberg survey expect the bank to hold rates again next week, and many of them expect the easing cycle to start at the following June meeting. Traders see about an eight in 10 chance of a cut by that month.

“Ultimately, today’s data confirms that the Canadian economy isn’t as strong as official GDP data and the Bank of Canada are making out, and that substantial rate cuts are needed to avoid a more sinister unwind,” Simon Harvey, head of FX analysis at Monex Canada, said in an email.

The rise in the unemployment rate in March was driven by an increase of 60,000 people searching for work or on temporary layoff, which brought the total number of unemployed people to 1.3 million. The majority of people who were unemployed in February also remained jobless last month, indicating a period of greater difficulties in finding work.

The participation rate held steady at 65.3 per cent for the third consecutive month. The employment rate — the proportion of the working-age population that’s employed — declined by 0.1 percentage points to 61.4 per cent, the sixth straight monthly decrease.

Over the past year, the employment rate has decreased by 0.9 percentage points as the creation of 324,000 jobs has been outpaced by working-age population growth of one million. In 2023, Canada’s population grew at an annual rate of 3.2 per cent, among the world’s fastest due to high levels of immigration.

The Bank of Canada will likely view the overall results as pointing to more disinflationary pressure ahead, Douglas Porter, chief economist at Bank of Montreal, said in a report to investors. The central bank will await the next couple inflation prints, but a June cut is looking more likely now, he said.

“So, even with an upgrade to GDP, the door is open wide for the bank to sound more dovish at next week’s policy meeting,” Porter said.

Total hours worked in March were virtually unchanged on the month but rose 0.7 per cent from a year ago.

Wage growth for permanent employees accelerated slightly to five per cent, matching expectations and up from 4.9 per cent a month earlier.

Job losses were led by accommodation and food services, which saw employment fall by 27,000. Wholesale and retail trade as well as professional and technical services also shed jobs. Health care and social assistance and construction saw the biggest employment gains.

Regionally, employment fell in Quebec, Saskatchewan and Manitoba. Although Ontario saw an increase, the province’s unemployment rate rose 0.2 percentage points to 6.7 per cent as more people searched for work.

Ontario’s St. Catharines-Niagara metropolitan area saw the largest year-over-year increase in the jobless rate to 7.6 per cent, which is now the highest among large population centres. Toronto and Windsor’s unemployment rates reached 7.5 per cent in March.

— With assistance from Jay Zhao-Murray and Carter Johnson.

Bloomberg.com