Canada’s economic outlook dimmed further, as a surprise weakness in March hiring swept the prospect of a Bank of Canada interest rate cut back on the table.
According to the latest Statistics Canada report, the labor market suffered an unexpected loss of 33,000 jobs in March, the worst reading in three years and well below the FactSet consensus prediction of a 20,000-job gain. The unemployment rate also edged higher to 6.7% from 6.6% in February, as trade war uncertainty seeped into the labor market.
This setback comes amid a perfect storm of global trade tensions and recession fears, tempering what until recently seemed like a certain prospect of a pause in the central bank’s interest-rate-cutting cycle. Barely a week ago, analysts anticipated a hold at the Bank of Canada’s April 16 meeting. Now, many say another cut may be in order.
The uptick in unemployment coincides with advance GDP data suggesting stalled economic growth in February. Combined with the drag from ongoing trade chaos, the central bank may feel increasing pressure to stimulate the economy by further cutting rates to support faltering consumer and business spending. The Bank has already whittled down its policy rate seven consecutive times (twice this year), bringing it down from a peak of 5.00% last summer to 2.75%.
Here is some commentary from economists’ notes to clients about the March jobs report.
Douglas Porter, chief economist at BMO Economics
“Canadian employment fell 32,600 in March (or down 0.2%), the softest jobs report in three years and … signaling that the widespread decline in business (and consumer) sentiment in the past two months played out in real decisions last month.
“The Bank of Canada will likely still want to see more data before cutting rates further. Falling energy prices and the end of the carbon tax will help dampen inflation pressures (but only in April, after a likely strong March print—which will be out the day before the next rate decision on April 16). However, the Bank has made it clear it is cautious about further cuts at this point. Still, the weak jobs data along with the deep sag in global markets will keep prospects of an April rate cut very much alive. We lean against a move at this point, but the situation is, shall we say, fluid.”
Bradley Saunders, North America economist at Capital Economics
“While US tariffs will be the obvious culprit for the fall in employment in March, two-thirds of the decline was concentrated in the services sector, suggesting that other factors were at play. Nonetheless, the broad-based weakness in last month’s Labor Force Survey does not bode well for the outlook, especially with timely surveys showing firms’ hiring intentions falling sharply. This raises the chances of the Bank of Canada cutting interest rates again at this month’s meeting, despite the relatively positive news on tariffs earlier this week.
“While Canadian exporters may have escaped ‘Liberation Day’ relatively unscathed, we still expect US tariffs to weigh on GDP growth – and, in turn, hiring – this year. Indeed, various timely surveys show firms’ hiring intentions were at their lowest since the pandemic last month. Meanwhile, [automaker] Stellantis’ decision to temporarily close its Windsor plant this week, which employs almost four thousand staff, is evidence of the uncertainty which US tariffs will pose for Canadian manufacturers going forward. We therefore expect the unemployment rate to rise to 7.0% by year-end in spite of slower labor force growth. This will help give the Bank of Canada confidence to cut interest rates three more times this year, taking the policy rate down to 2.0%.”
Andrew Grantham, senior economist at CIBC Economics
“The wheels may be starting to come off the Canadian labor market, with a 33K decline in jobs during March coming in well below consensus forecasts for a 10K gain. Admittedly, the soft readings that we have seen over the past two months followed a string of better-than-expected releases beforehand, and the six-month average change in employment is a reasonably solid 30K. However, the concerning recent trend, combined with the likelihood of further weakness ahead as US tariffs start to impact hiring decisions, leans towards further reductions in interest rates from the Bank of Canada, although the timing will depend on next week’s business and consumer surveys as well as global risk sentiment.
“Today’s report was clearly weaker than expected, although next week’s Bank of Canada surveys and global risk sentiment will also be key in determining whether the Bank cuts interest rates later this month or elects to skip a meeting before continuing in June. We continue to expect some further weakness in employment ahead, particularly in sectors most directly impacted by US tariffs, which could see the unemployment rate peak slightly above 7% during the second half of the year.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Neither of these employment readings will force the Fed or the Bank of Canada to ease monetary policy in the near-term. That said, the trade war-induced tightening in financial conditions is certainly something central bankers will be monitoring very closely.
“Should markets not settle down by the time of the next monetary policy decision dates, officials could be forced to deploy some additional support. Both US Treasury yields and rates on Government of Canada bonds are somewhat higher following the release of the data.”
Matthieu Arseneau, economist at the National Bank of Canada
“The repercussions of American protectionism and uncertainty on the job market are already being felt in March, with employment falling by 33K, the worst monthly performance in 38 months. The indicator of hiring intentions also deteriorated sharply, with a greater proportion of firms now expecting to reduce rather than increase the number of employees (see chart below). So it should come as no surprise if the March data was just the start of an unwelcome trend for the Canadian labor market.
“It is true that Canada breathed a sigh of relief on April 2 when the reciprocal tariffs were unveiled, as the USMCA partners were relatively spared this time. However, the US administration has set the stage for significant tariffs to be imposed on all trading partners, who will inevitably retaliate. Without a de-escalation before tariffs are imposed, Canada, which is heavily exposed to the US and global economies through commodity prices, risks being dragged down along with everyone else. While we see the need for further monetary easing in the coming months, the April Bank of Canada decision is still up in the air. If everything Macklem has said since the March decision is to be believed, a pause remains likely given concerns about inflation and inflation expectations anxiety. However, given the renewed labor market weakness and rapid deterioration in financial conditions that could continue without a turnaround from the White house, it will become more difficult to stay on the sidelines for the Bank of Canada.”
Claire Fan, senior economist at Royal Bank of Canada
“March’s Canadian labor market report was slightly softer than we expected, and the broader concern is that further weakness is still in the pipeline if the United States follows through with aggressive tariff hikes on global trade partners announced earlier this week. “The last round of US reciprocal tariffs has mostly excluded Canada additional tariffs directly. But newly implemented (finished) auto tariffs could impact jobs in auto manufacturing and related sectors. Moreover, broader US growth risks from much larger tariffs threatened to be imposed on imports from most of the rest of the world would spill over to negatively impact Canada as well.
“In future meetings, the Bank of Canada will have to continue to balance the downside risks to the economy from international trade threats with the mandate to maintain a 2% inflation target, and we continue to assume that fiscal support will need to be the first line of defense to any trade driven economic shock. Our current base case does not assume a race to the bottom for interest rates in Canada but does assume another cut in April.”
Tu Nguyen, economist at RSM Canada
“Trade uncertainty is causing vast fluctuations in job numbers. Earlier this year, the Canadian economy saw additional jobs as businesses pulled forward orders in anticipation of tariffs. However, now that many tariffs are in place, the trend in the upcoming months is more layoffs and unemployment as tariffs cause widespread economic pains.
“This will be especially prominent in trade-dependent industries such as wholesale and retail trade, manufacturing, especially auto production, and steel and aluminum, due to tariffs. Already, several auto manufacturing plants have halted production and temporarily lay off workers in response to the US’ 25% tariffs on all auto imports.
“Weariness about the macro economy and recession fears, including that of a global recession, will cause layoffs and delays in hiring across sectors. Given the unexpected large job losses in March, the Bank of Canada might cut the policy rate again this month to 2.5%, even though US tariffs are hitting almost all countries and not just Canada, and some underlying inflationary pressures are still present.”
Derek Holt, vice president and head of capital markets economics at Scotiabank
“Statcan applied the lowest seasonal adjustment factor on record for months of March to the job figures. Doing so worsened what was little changed in the seasonally unadjusted drop of –11k. As for the Bank of Canada, I don’t think they will much care about these jobs numbers including the SA [seasonally adjusted] factor distortions. For one thing, it’s just one number, although the prior month was soft as well and with weather and SA factors also weights in February.
“What will carry the day is that the trade shock is much bigger than anyone anticipated—especially those who felt the Bank of Canada would keep cutting but that tariffs would never materialize! Reasons matter.”
James Orlando, director and senior economist at TD Bank
“The impact of trade tariffs appears to be working its way through the economy. Businesses and consumers are naturally hesitant in the face of heightened political uncertainty. Today’s report reflects this, with full-time jobs in the cyclically sensitive private sector driving the losses. Those that lose their jobs are also taking longer to find work, a sign that the Canadian labor market is starting to loosen in response to the imposition of tariffs.
“The Bank of Canada is increasingly likely to cut its policy rate further. While pricing for April is still undecided, we think the bank should keep cutting by at least another 50 basis points (cumulative) over the coming months in order to cushion the blow from tariffs. Today’s discouraging jobs report showcases the downside risks to the economy, which warrants further action from the Bank of Canada.”
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