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A surprising rise in hiring during May was welcome news, but with the unemployment rate rising for a third consecutive month, economists say the Bank of Canada has ample justification to continue cutting interest rates down the road.
The Canadian economy added 8,800 jobs in May, well above the modest FactSet consensus estimate of 1,500. At the same time, the unemployment rate edged up by 0.1% to 7.0%, matching the estimate. According to Statistics Canada’s April Labor Force Survey, the increase was driven largely by trade-sensitive sectors such as manufacturing and transportation and warehousing. Excluding the pandemic period, this marks the highest unemployment rate since September 2016.
The report highlights the growing toll of US tariffs on the Canadian economy, with employers increasingly holding off on hiring or reducing headcounts while they navigate the ongoing uncertainty. Meanwhile, recent strength in Canada’s GDP presents a conflicting picture for the Bank of Canada’s complex rate-setting calculus.
The Bank held its policy rate at 2.75% last Wednesday, its second pause in a row after aggressively lowering from a peak of 5.00% last summer.
Still, analysts argue that the central bank must resume cutting rates to offset the mounting drag on the economy from tariffs, a weakening labor market, and slowing business and consumer spending.
Here is some commentary from economist notes to clients on the May jobs report.
Labor Market Strength Justifies the Bank of Canada’s Decision to Hold the Rate
Charles St-Arnaud, chief economist at Alberta Central
“The report shows that the US tariffs continued to have an impact on Canada’s labor market, with a fourth consecutive decline in manufacturing employment. While there are signs of resilience in the rest of the economy, job gains in other sectors remain subdued. The question for the Canadian economic outlook is whether we will see further deterioration in the labor market, leading to sizeable job losses.
“The resilience of the labor market in May is likely to provide some confidence to the Bank of Canada that it took the right decision to pause at the June meeting and to wait for more information. Moreover, the Bank of Canada made it clear this week that inflation is their primary focus currently. Unless underlying inflationary pressures ease, it would require a significant deterioration of the economy for them to cut rates. With this in mind, the next CPI report on June 24 holds the answer to whether the Bank of Canada will cut in July.”
Mounting Joblessness Will Keep the Central Bank in Easing Mode
Douglas Porter, chief economist at BMO Economics
“The May jobs report definitely could have been worse, given that it was burdened by the loss of more than 30,000 election workers—any increase is a small win. And the gains in private-sector and full-time jobs are encouraging. But, standing back, the bigger picture is that the manufacturing sector is under intense strain amid the deep trade uncertainty, and the overall job market continues to soften—highlighted by the grinding rise in the unemployment rate.
“In little more than two years, the jobless rate has risen by 2 percentage points, as we have gone from a situation in 2022 and 2023 when it was difficult to find workers to, today, when it is difficult to find work. While May’s mixed report doesn’t give a clear-cut signal to the Bank of Canada, we believe that the bigger trend of a rising jobless rate will keep them very much in easing mode through the second half of the year.”
Unemployment Will Rise Despite Slowdown in Immigration
Stephen Brown, North America economist at Capital Economics
“The rise in employment in May was better than expected but, paired with recent data, still shows that the labor market is struggling. We are therefore sticking to our view that the Bank of Canada will cut interest rates by more than markets expect in the coming months, despite the decision to keep policy unchanged earlier this week.
“The 8,800 rise in employment in May was better than the fall we and the consensus had expected but still means the labor market is yet to fully reverse March’s 32,600 plunge. Slowing immigration meant the Labor Force Survey population measure grew by just 37,000 in May – its slowest pace in four years. While this caused labor force growth to slow too, the weak employment figures meant the unemployment rate still rose to 7.0% – its highest since 2016. Despite slowing immigration, we think there is further upside for the unemployment rate given the weakness in the labor market.”
Joblessness Will Continue to Rise in the Second Half of the Year
Andrew Grantham, senior economist at CIBC Economics
“The Canadian labor market continues to weaken, albeit for now only gradually. While today’s data was not quite as bad as expected, there’s still signs of slack gradually building in the labor market which supports our call for a return to interest rate cuts at that July meeting, albeit admittedly with a lot more data and tariff news still to come before that decision.
“Today’s data suggest that while the economy isn’t yet contracting, it also isn’t living up to its long-run potential resulting in a continued drift higher in the unemployment rate. We expect that the gradual rise in joblessness will continue into the second half of the year, with positive developments regarding US tariffs and some further interest rate cuts from the Bank of Canada required to help stabilize conditions before year-end and bring a reduction in the unemployment rate again in 2026. Bond yields were higher following today’s data, as investors slightly lowered the probability of a July rate cut from the Bank of Canada.”
Higher Yields Across Curve Do Not Indicate an Economic Collapse
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Despite the economy adding jobs once again in May, Canada’s jobless rate breached a key threshold. The labor market added just under 9K new positions, similar to the pace observed in the prior month. However, the May reading included a decline of 21K jobs in the public sector, attributable in part to the reversal of the temporary hiring done for the federal election in April. Overall, job growth has looked very weak this year, but importantly the labor market has not shown signs of major destruction tied to the trade war just yet.
“Our tracking forecast still sees Q2 GDP growth in a range between 0.0-0.5%, but the risk appears to be to the downside given the trade data earlier in the week. Today’s employment reading was slightly better than what the consensus had expected, a big sigh of relief given what could have transpired as a result of the elevated uncertainty. Rates are higher across the Government of Canada yield curve since this set of data doesn’t do anything to suggest that the bottom was falling out of the economy in May.”
Canada’s Economic Decline is the Most Notable in the World
Matthieu Arseneau, economist at the National Bank of Canada
“The May employment data was better than economists had expected. It was common knowledge that the number of jobs would be reduced because around 30K temporary workers had been hired for last month’s elections. This is why it is important to focus on private-sector jobs, as these provide a clearer indication of the impact of the ongoing trade war on the economy. In this regard, May’s data is a little reassuring.
“However, despite the significant gain in May, the deterioration in the labor market continued, as evidenced by the unemployment rate reaching its highest level since September 2021 and September 2016, excluding the pandemic. Since February, the unemployment rate has risen by no less than four-tenths of a percentage point, with private sector job growth declining at a time when public sector job growth has stalled. This data indicated that Canada’s economic contraction is the most pronounced in the world for both the manufacturing and service sectors. Canada was already experiencing excess supply, and this morning’s figures show that the situation is continuing to deteriorate. We continue to believe that this economy will require accommodative monetary policy before long.”
Canada’s Recession to Further Accelerate Unemployment Rate
Michael Davenport, senior economist at Oxford Economics
“The trade war-induced slump in Canada’s labor market continued in May, as employment was essentially unchanged for the second consecutive month and the unemployment rate rose ticked up to 7% — the highest level since September 2016, aside from the pandemic. This was slightly stronger than our expectations for a modest decline, but largely in line with the consensus.
“The labor market is weakening as the impact of the trade war builds, but for now, job losses appear relatively contained to industries like manufacturing that are directly exposed to tariffs. However, we think a recession is now underway that will soon begin to broaden to other sectors of the economy and drive the unemployment rate up to around 7.5% by the end of this year.”
Tariffs Are Hitting Manufacturing and Transportation the Hardest
Claire Fan, senior economist at Royal Bank of Canada
“Another small positive print (+8.8k) in job growth in May was firmer than expected, and shows resilience in the Canadian labor market amidst ongoing trade grievances that sent Canadian exports plunging in April. Sectors that are the most exposed to trade headwinds, namely manufacturing and transport and warehousing shed jobs. The level of manufacturing employment is also at its lowest level since January 2023, particularly affecting regions like Windsor Ontario where the unemployment rate rose to nearly 11% in May.
“Still, employment counts were firmer in other sectors including wholesale and retail, supported by resilient domestic consumer spending. Overall, the data is consistent with our view that labor market is softening but not collapsing. We expect trade disruptions will keep acting as headwinds, but think further deterioration will be contained with the unemployment rate peaking at levels slightly above May’s 7.0% reading.”
Strength in Full-Time Employment and Trade Cast Doubt on July Rate Cut
Tu Nguyen, economist at RSM Canada
“The impact of tariffs and trade uncertainty continues to ripple through Canada’s labor market, as the unemployment rate climbed to 7% in May, the highest since 2016 excluding during the pandemic. While the trade sector has mostly recovered from April’s loss by adding 43,000 jobs, the impact is spreading across industries from accommodation and food services to transportation.
“The market is particularly challenging for those currently unemployed as they take longer to find work. Students will have a tough summer job market as many summer jobs, such as those in accommodation and food services and retail often depend on a growing economy and increasing consumer spending. We expect unemployment to continue rising throughout the summer, potentially to as high as 7.5%. That said, the increase in full-time jobs as well as trade shows some resilience in the economy, making the prospect of a July rate cut uncertain.”
Upcoming CPI Reports to Provide Direction for Monetary Policy
Derek Holt, vice president and head of capital markets economics at Scotiabank
“I’m shocked that Canada’s job market was so strong last month. That’s not just in reference to the headline reading as the details were strong across the board. First, almost everyone was expecting a negative and we got a modest gain of 8,800 jobs. Second, the gain was despite getting the expected drop in public administration jobs that largely reflected the unwinding of the election effect from the prior month. Public admin jobs fell by 32.2k which is consistent with the past half dozen elections. So, take that out, and underlying job growth was up by 41k. That’s a strong reading
“While the unemployment rate ticked up to 7% because the labor force expanded by 35k last month and that exceeded aggregate job growth. The unemployment rate controlling for the election related loss of public admin jobs would not have risen. Further, the rise of the unemployment rate since 2022 has been mostly focused upon excessive numbers of temps. I think the Bank of Canada will fade these numbers. Not because they’re bad; they’re actually quite good. But because their reaction function has signaled a stronger focus upon the next two CPI reports notwithstanding how contradictory its guidance is right now.”
May Jobs Report Bolsters the Case for Further Rate cuts
Leslie Preston, managing director and senior economist at TD Bank
“Canada’s labor market continued to soften in May. The unemployment rate continued to rise, and the impact of US tariffs is clearly evident in industry and regional patterns. Wage gains were steady in May but have cooled from a roughly 5% pace a year ago.
“On Wednesday, the Bank of Canada opted to wait and see how tariffs would impact the Canadian economy, while also weighing recent hotter than expected inflation readings. May’s jobs report puts another mark in the economic weakness tally. We think this will ultimately lead to further rate cuts from the Bank of Canada.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
