Canada jobs rise by 53,600 in third month of surprise gains

Key Concepts

• Canadian Economic Strength: Unexpected positive performance towards the end of the year, particularly in job numbers.
• Part-time Employment: A key indicator of renewed business confidence, especially for youth.
• CFIB Business Barometer: A metric showing an uptick in business sentiment.
• Capital Expenditures (Capex): Future business investment, crucial for sustained economic growth.
• Bank of Canada Rate Cuts: A tailwind for consumers, stimulating economic activity.
• 2026 Economic Outlook: Potential for Canada to outperform pessimistic growth forecasts.
• USMCA (United States-Mexico-Canada Agreement): A significant risk factor for 2026 due to potential US withdrawal.
• Bilateral Trade Discussions: The likely outcome of USMCA renegotiations, potentially involving Canada and Mexico negotiating as a bloc or individually.
• Canadian Energy Sector: A strategic asset for Canada in trade negotiations with the US.
• Steel and Aluminum Tariffs: Potential to be resolved through USMCA renegotiations.
• Bank of Canada Monetary Policy: Expected to hold rates this month, with a more positive tone due to stronger GDP data.
• Inflation Resilience: A concern due to stronger economic data and labor market gains, potentially leading to future rate hikes.
• Canadian Dollar: Expected to be supported by potential rate hikes and overall economic outlook.
• Global Business Cycle: Contrasting views on its stage, with some seeing it in late innings and others in earlier stages.
• Monetary Policy Cycle: A leading indicator suggesting the global business cycle is in an earlier phase.
• Central Bank Coordinated Cuts: Significant monetary easing by central banks globally.
• US Energy Dependence on Canada: Canada's role as a major supplier of oil and ports to the US.
• US Chamber of Commerce Pressure: Lobbying efforts to maintain USMCA and remove tariffs.

Canadian Economic Performance and Job Market

The Canadian economy is demonstrating unexpected strength as the year concludes, notably in its recent job numbers. Sebastian McMahon, portfolio manager at IIA Global Asset Management, highlights that the resurgence in part-time employment, particularly among young people, is a positive sign. This indicates that businesses are regaining confidence, as part-time positions are typically the first to be cut when sentiment wanes. The increase in part-time hiring, coupled with a rising CFIB Business Barometer, suggests businesses are "getting their mojo back." This renewed confidence is seen as a crucial precursor to private sector investment in 2026, even if capital expenditures (capex) haven't fully materialized yet. The Bank of Canada's rate cuts are acting as a tailwind for consumers, creating a favorable setup for Canada to potentially outperform the pessimistic consensus growth forecast of 1.2% for 2026, with expectations leaning closer to 2%.

The recent job gains are described as broad-based, with Quebec and Ontario experiencing lower unemployment rates. The national unemployment rate has reached its lowest point in 16 months, providing solid reasons for optimism about the Canadian economy.

USMCA and Trade Risks for 2026

A significant risk for the Canadian economy in 2026 is the potential withdrawal from the USMCA by the United States, as indicated by US Trade Representative Jameson Green. This could lead to bilateral trade discussions as early as the beginning of 2026. While Canada and Mexico might prefer to negotiate as a bloc, bilateral discussions are more likely. Canada possesses strategic advantages, particularly in its energy sector, which could be leveraged in these negotiations. Despite potential uncertainty at the outset of 2026, there's an opportunity to negotiate an exit from steel and aluminum tariffs and potentially secure a more favorable trade deal than the current situation. These trade issues are identified as key concerns for 2026.

Bank of Canada's Stance and Inflation Concerns

The Bank of Canada is expected to hold its interest rates this month. The recent upward revisions to Canadian GDP data suggest a stronger economy than previously anticipated, which may lead the Bank to adopt a more positive tone. This economic strength also brings back the "ghost of inflation," potentially explaining why inflation has remained resilient, staying above 2% for most of the recent months. Combined with gains in the labor market, there's a possibility of pricing in a rate hike in late 2026, though this is not the base case scenario. The Bank is likely adopting a risk management approach, which is considered the correct strategy. This stance could support the Canadian dollar, which has seen a positive trend recently, and the outlook for the Canadian dollar in 2026 remains bullish.

2025 as a Year of Extremes and Global Business Cycle Outlook

Looking ahead, 2025 is characterized as a year of "extremes," influenced by factors like "Trump 2.0," trade issues, and AI. However, there's a divergence in views on the global business cycle. While some economists perceive it to be in the "seventh or eighth inning" of a baseball game, McMahon's perspective, based on the monetary policy cycle, suggests it's more akin to the "third or fourth inning." This is because the monetary policy cycle is at its highest level in 25 years, with coordinated rate cuts by central banks globally, support measures from China, and the US Federal Reserve still in its cutting cycle. This outlook points towards acceleration rather than exhaustion of the global business cycle.

Canada's Energy Advantage and US Business Relations

Canada's significant energy resources are highlighted as a key advantage. Over 50% of US oil and ports originate from Canada, underscoring US dependence on Canadian energy and electricity. This positions Canadian companies in the energy sector favorably to support the US. US businesses themselves recognize the importance of their relationships with Canadian and Mexican counterparts. The US Chamber of Commerce is reportedly exerting considerable pressure on the US government to remain committed to USMCA and resolve existing tariffs. This is deemed essential for the business models of US companies. While the narrative surrounding USMCA may worsen in early 2026 as Trump challenges the agreement, the eventual outcome could bring more certainty to Canadian businesses compared to the current "rut."

Conclusion

The Canadian economy is showing signs of unexpected resilience and strength, particularly in its job market, driven by a resurgence in part-time employment and renewed business confidence. While the USMCA renegotiations present a significant risk for 2026, Canada's strategic energy sector offers leverage. The Bank of Canada is expected to maintain its current interest rate, but the stronger economic data and persistent inflation could lead to future rate adjustments. The global business cycle is viewed as being in an earlier stage than some pessimistic forecasts suggest, with potential for acceleration. Ultimately, Canada's energy exports and its relationship with US businesses are key strengths that could lead to a more favorable trade outcome and greater economic certainty.