'The economy is still very vulnerable to any potential shocks': Figueiredo on Canada's economy

Key Concepts

• Labour Market Stabilization: The Canadian labour market is showing signs of stabilizing after a period of strong growth.
• Bank of Canada (BoC) Monetary Policy: The discussion centers on whether the recent economic data will influence the BoC’s decision regarding interest rates (potential rate cuts vs. hikes).
• USMCA (United States-Mexico-Canada Agreement): A significant risk factor for the Canadian economy, with potential renegotiation or abandonment posing a substantial threat.
• Non-Permanent Residents: The flow of non-permanent residents significantly impacts youth unemployment statistics in Canada.
• Forward-Looking Indicators: Hiring intentions remain weak despite recent positive labour market reports, suggesting employer hesitancy.
• FOMC (Federal Open Market Committee): The US Federal Reserve’s monetary policy body.

Canadian Labour Market & Bank of Canada Outlook – December Data Analysis

The Canadian unemployment rate increased to 6.8% in December, despite a gain of 8,200 jobs. Thiago Bigorito, macro strategist at Dejardan, interprets this data as a return to more realistic figures following several months of surprisingly strong readings. He emphasizes that the labour market appears to be stabilizing, though acknowledges the labour force survey may overestimate actual progress. The core takeaway is that the situation isn’t worsening, which is considered positive.

Sectoral Job Losses & Gains

The job gains were primarily in manufacturing, while losses were concentrated in technical and scientific sectors. Bigorito notes that trade-related sectors have been particularly hard hit, though some stabilization is occurring. However, there’s currently no evidence of weakness spreading to other sectors. He clarifies that the data presents a “mixed bag” and doesn’t provide a compelling case for the Bank of Canada to consider raising interest rates.

Youth Unemployment & Demographic Shifts

Youth unemployment saw gains in October and November but experienced a setback in December. Bigorito attributes this volatility to the movement of non-permanent residents in and out of the country. He explains that a historically high youth unemployment rate was partially driven by an influx of young people entering Canada, and their subsequent departure is now contributing to fluctuations in the rate. He considers the recent increase in youth unemployment as “noise in the data.” This is linked to recent changes in immigration policies.

Impact on Bank of Canada Monetary Policy

The data doesn’t significantly alter Bigorito’s outlook for the Bank of Canada. He was already skeptical of the strength of previous labour market reports. The market had prematurely priced in a potential rate hike by year-end, but Bigorito believes the Canadian economy remains vulnerable to shocks. He suggests the risks over the next six months are tilted towards a potential rate cut by the BoC, although he doesn’t necessarily expect it. He posits that if a negative shock occurs, policymakers wouldn’t hesitate to lower rates. As the year progresses and fiscal policy potentially increases, the risks may shift, but in the near term, the BoC is the primary tool for economic protection.

Quote: “I still think that the economy is still very vulnerable to to to any potential shocks.” – Thiago Bigorito

Employer Hesitancy & Forward-Looking Indicators

Bigorito confirms that employers remain hesitant about the economic outlook and are delaying hiring decisions. This is supported by weak hiring intention data, even during periods of strong labour force reports. This hesitancy is expected to be further compounded by uncertainty surrounding the future of the USMCA agreement.

US Economic Data & Federal Reserve Policy

The US also released jobs data, showing growth but at a very muted pace. Bigorito observes a deceleration in US hiring. The US unemployment rate is hovering around levels consistent with the Federal Open Market Committee’s (FOMC) long-term forecasts, causing minimal concern. However, downside risks to the US labour market remain. He anticipates the Federal Reserve will likely remain on hold for the first half of the year, with potential rate cuts later in the year, but no immediate rush to lower rates.

Technical Term: FOMC (Federal Open Market Committee) – The branch of the Federal Reserve System that determines the direction of monetary policy.

Key Risks to the Canadian Economy

The most significant risk to the Canadian economy, according to Bigorito, is the potential disruption or abandonment of the USMCA agreement. He highlights that USMCA has shielded Canada from many tariffs and any threat to its continuation would be a “material change” to the Canadian economic outlook, forcing adjustments to forecasts for both the economy and the Bank of Canada. He considers this the primary source of volatility in the first half of the year.

Technical Term: USMCA (United States-Mexico-Canada Agreement) – A free trade agreement between the United States, Mexico, and Canada, replacing NAFTA.

Conclusion

The December labour market data suggests a stabilization in the Canadian economy, but doesn’t warrant a shift in the Bank of Canada’s monetary policy stance. The primary concern remains external shocks, particularly related to the USMCA agreement. Employer hesitancy and weak hiring intentions further reinforce a cautious outlook. While a rate cut isn’t currently expected, it remains a possibility if negative economic developments occur. The US economy is showing signs of deceleration, but the Federal Reserve is expected to remain on hold for the near future.