Are fewer people searching for work in Canada?

Key Concepts

• Labour Force Participation Rate: The percentage of the population that is either employed or actively looking for work.
• Establishment Survey: A monthly survey conducted by Statistics Canada that measures employment directly from businesses.
• KSMA (Canada-United States-Mexico Agreement): The trade agreement replacing NAFTA, impacting Canadian industries through tariffs and trade policies.
• Trade War/Trade Policies: Government actions and retaliations involving tariffs and trade restrictions, creating economic uncertainty.
• Bank of Canada Policy Rates: The interest rates set by the Bank of Canada to influence economic activity.
• Stimulative Policy: Monetary policy (like lower interest rates) designed to encourage economic growth.

Labour Market Analysis & Economic Outlook – Sal Guatieri, Beimo Capital Markets

Labour Market Trends & Unemployment Rate

Sal Guatieri, Senior Economist at Beimo Capital Markets, attributes the recent drop in the Canadian unemployment rate primarily to a decrease in the number of people actively seeking employment, rather than a surge in job creation. He highlights a slowing labour force growth, linked to reduced immigration and overall population growth trends. Specifically, he notes the unemployment rate fell in January, but “it wasn’t because more people were were getting hired finding work and that’s that’s quite unfortunate.” The overall jobs report for January was described as “a bit disappointing” with a 25,000 job decline. This decline was concentrated in Ontario, potentially influenced by a significant snowstorm, but Guatieri emphasizes it aligns with the weaker signals from the establishment survey and broader economic data.

Manufacturing Sector Weakness & Trade Impacts

The conversation focuses heavily on the sustained weakness in the Canadian manufacturing sector. Guatieri states that manufacturing has experienced the largest job losses of any sector in Canada over the past year, exceeding 50,000 jobs. These losses are directly attributed to the ongoing trade war and associated tariffs, particularly impacting the auto industry and industries subject to tariff burdens. While the weakness is currently contained within the factory sector, Guatieri cautions that it won’t be a source of job creation “for quite some time” until clarity emerges regarding trade policies and the renegotiation of KSMA.

KSMA Renegotiation & Future Uncertainty

Guatieri expresses a pessimistic outlook regarding the KSMA renegotiation process. He anticipates the negotiations will be protracted, potentially extending into 2028 or beyond, with a series of annual reviews rather than a comprehensive agreement this year. He states, “our main assumption is that we do not see um an end to those talks this year.” This prolonged uncertainty is expected to continue discouraging business investment and hiring in Canada. While some relief from high tariffs on steel, aluminum, and motor vehicles is hoped for, a full rewrite of KSMA in the near term is not anticipated.

Bank of Canada Monetary Policy

Regarding the implications for the Bank of Canada, Guatieri believes the jobs report is “mixed enough that it really is um mixed enough that it doesn't move the needle for the Bank of Canada's next policy decision in March.” The Bank will acknowledge the unemployment rate decline, but recognize its unfavourable cause (fewer job seekers). The decline in employment itself is a concern, corroborating other weak labour market surveys and indicating a sluggish economy.

Guatieri asserts the “bar for the Bank Canada to do anything policy-wise is still is pretty high.” The Bank is currently comfortable with mildly stimulative policy rates and is unlikely to cut rates unless the economy deteriorates. He also believes the threshold for raising rates is even higher due to trade policy uncertainty, predicting the Bank of Canada will remain on hold “well into next year.”

Data & Statistics Mentioned

• Job Loss in Manufacturing: Over 50,000 jobs lost in the manufacturing sector in Canada over the past year.
• January Employment Decline: A 25,000 job decline in overall employment for January.
• KSMA Renegotiation Timeline: Expectation of prolonged negotiations, potentially extending into 2028 or beyond, with annual reviews.

Logical Connections

The discussion flows logically from an analysis of the current jobs report to a broader assessment of the Canadian economy. The initial focus on the unemployment rate quickly transitions to the underlying factors driving it, namely the shrinking labour force and the weakness in the manufacturing sector. This weakness is then directly linked to the ongoing trade war and the uncertainty surrounding KSMA renegotiations. Finally, the economic outlook informs the assessment of the Bank of Canada’s likely monetary policy response.

Conclusion

Sal Guatieri presents a cautiously pessimistic view of the Canadian economy. While a recession has been avoided, growth remains modest and is hampered by trade policy uncertainty. The labour market is showing signs of weakness, driven by declining labour force participation and job losses in the manufacturing sector. This environment suggests the Bank of Canada will likely maintain its current monetary policy stance for the foreseeable future, prioritizing stability over proactive adjustments. The key takeaway is that the Canadian economy is facing significant headwinds, primarily stemming from external trade factors, and a sustained recovery hinges on resolving these uncertainties.