'Canadian economy is still struggling under the weight of tariffs and uncertainty': Reitzes

Canadian Employment Numbers - December 2023 Analysis

Key Concepts:

• Unemployment Rate: The percentage of the labor force that is actively seeking employment but unable to find work.
• Labor Force Participation Rate: The percentage of the civilian noninstitutional population that is either employed or actively seeking employment.
• Output Gap: The difference between the actual level of output in an economy and its potential output. A negative output gap indicates slack in the economy.
• USMCA (United States-Mexico-Canada Agreement): A free trade agreement governing trade between the three countries.
• Demographics: The statistical characteristics of a population, including age and immigration patterns.
• Full-time vs. Part-time Employment: Categorization of jobs based on the number of hours worked.
• Productivity: A measure of economic output per unit of input (e.g., labor).

1. Labor Market Overview & December Data

Canadian unemployment rose to 6.8% in December. Despite this increase, the country added over 8,000 jobs, exceeding market estimates. Benjamin Rezes, Managing Director and Canadian Rates & Macro Strategist at BIMO, characterized the situation as “hanging in there,” noting volatility in recent months – weakness in the summer, a rebound in the fall, and a December report consistent with a softer broader economy. The December gain was primarily in full-time positions, while part-time employment decreased. A significant increase in the labor force, larger than population growth, was also observed, described as an “interesting quirk” requiring trend analysis rather than focusing on monthly fluctuations.

2. Economic Context & Influencing Factors

The current labor market performance is occurring amidst concerns regarding tariff impacts, the COSMA (likely referring to corporate tax changes), and limited business investment. Rezes suggests the recent job numbers are “consistent with a Canadian economy that is still struggling under the weight of tariffs and uncertainty.” Demographic shifts, specifically an aging population and reduced immigration, are also playing a role, though primarily as a longer-term trend. He anticipates a gradual decline in the participation rate as the population ages, potentially offsetting some unemployment increases over time. The reduction in temporary foreign workers is also contributing to the current dynamics.

3. Labor Force Dynamics & Participation

The increase in the labor force, defined as individuals working or actively seeking work, is a key observation. Economists generally view an increasing participation rate as a positive indicator of economic health, leading to increased production and income. However, Rezes emphasizes the need to analyze trends over time due to inherent volatility in monthly data. Government policies are in place to encourage labor force participation, but demographic factors continue to exert influence.

4. Wage Growth Analysis

Wage growth is currently around 3.5%, consistent with the yearly average, but trending downwards from previous years. Rezes expresses hope that government initiatives aimed at boosting Canadian productivity will ultimately drive higher wage growth, creating a positive feedback loop of increased earnings and income.

5. Historical Unemployment & Output Gap

The current unemployment rate of 6.8% is not historically high, but is elevated compared to the consistently lower rates experienced over the past decade. Rezes links this to a “modest output gap” in Canada, estimated at around 1% (or slightly less) in the last Bank of Canada report. This output gap signifies slack in the economy, making it challenging to predict when economic conditions will improve.

6. USMCA & Business Uncertainty

Uncertainty surrounding the USMCA negotiations is identified as a significant impediment to business investment and hiring. Businesses are hesitant to expand their workforce without clarity on the future trade landscape. This sluggishness in investment and hiring contributes to the challenging environment for job seekers.

7. The Impact of Artificial Intelligence (AI)

The potential impact of AI on the labor market is acknowledged, but deemed difficult to discern at this early stage. Rezes believes uncertainty surrounding business conditions is currently a more significant factor than AI itself. He suggests AI’s impact will likely be more pronounced on new entrants to the workforce and will unfold over the long term. He stated, “I wouldn’t stress that too much at this point.” He anticipates that a positive outcome in USMCA negotiations will improve business sentiment and lead to increased hiring, particularly among younger demographics (15-24 year olds).

8. Notable Quotes

• Benjamin Rezes: “Hanging in there is probably the right way to look at it.” (Regarding the current labor market)
• Benjamin Rezes: “It’s consistent with a Canadian economy that is still struggling under the weight of tariffs and uncertainty.” (Explaining the unemployment rate)
• Benjamin Rezes: “I wouldn’t stress that too much at this point.” (Regarding the impact of AI on the labor market)

9. Data & Statistics

• Unemployment Rate (December): 6.8%
• Job Growth (December): +8,000 jobs
• Wage Growth: Approximately 3.5% (annual average, trending lower)
• Output Gap: Approximately 1% (or slightly less) – Bank of Canada estimate.

Conclusion:

The Canadian labor market in December 2023 presents a mixed picture. While job growth exceeded expectations, the rise in unemployment and underlying economic uncertainties suggest a cautious outlook. Demographic trends, trade negotiations (USMCA), and the potential long-term impact of AI all contribute to the complexity. The key takeaway is that the Canadian economy is currently experiencing slack, and a resolution to trade uncertainties is crucial for stimulating investment, hiring, and sustained economic growth. Analyzing trends over time, rather than focusing solely on monthly fluctuations, is essential for understanding the true state of the Canadian labor market.