Will the Most Significant Job Growth in Two Years Impact Banks?

Job growth surged in December, according to the latest employment report from Statistics Canada, raising the prospect of the Bank of Canada pausing its interest rate cuts.

The economy added 91,000 jobs in December, significantly outpacing the FactSet forecast of 20,000, making for the strongest pace of new hiring in two years.

The latest data also revealed that the unemployment rate edged lower to 6.7% from 6.8% the previous month. December employment gains were broad-based across sectors, indicating a strengthening economy, which economists say takes the pressure off the Bank of Canada to aggressively cut rates to stimulate growth.

Will the Bank of Canada Keep Cutting Rates?

There is consensus among market participants over the need for continued rate cuts, although analysts remain split on the pace of these moves. Some now expect the Bank of Canada to take a breather at its meeting later this month, while others still expect it will deliver a quarter-point cut. In addition, investors remain jittery over the steep tariffs on Canadian exports proposed by US President-elect Donald Trump, which could derail Canada’s fragile economy. Here is some select commentary on the news.

Douglas Porter, chief economist at BMO Capital Markets

“The Canadian job market ended 2024 on an upbeat note, in line with our view that the broader economy was getting up off the mat. Having said that, the Labor Force Survey is notoriously volatile, and we certainly can’t pin too much on a single reading. Moreover, the possibility of U.S. tariffs loom over the economy as we begin 2025, and even the uncertainty may weigh on activity. Still, the solid job gains will prompt some meaningful doubt on whether the Bank of Canada will cut again in January following the hyper-aggressive 100 basis points of cuts in Q4. The fact that the Fed looks to move to the sidelines for a spell, and the Canadian dollar is struggling mightily may also chill the Bank of Canada for now.

“While one could quibble about a few of the details, most aspects of the report were sturdy—full-time employment rose 57,500, and hours worked jumped 0.5% m/m. The solid result is fully consistent with the view that the economy was picking up through late last year after a sustained struggle. Even amid the show of strength, one piece of welcome news for the Bank of Canada is that average hourly wages simmered down, as expected, to a 3.8% y/y pace. That’s the slowest wage growth since May 2022, and getting within shouting distance of pre-pandemic trends (generally a bit below 3%).

“From a big-picture standpoint, note that even with the overall economy struggling to grow much above a 1% pace for much of 2024, employment still rose by a solid 2.0% y/y in December, or a gain of 413,000.”

Nathan Janzen, assistant chief economist at Royal Bank of Canada

“The December labor market numbers are clearly firmer than expected, with headlines and details broadly better than feared. Still, the data is notoriously volatile, and the unemployment rate is still up almost a percentage point from a year ago and at its second-highest level (outside of the pandemic) since 2017.

“We continue to think it is unlikely that the broader uptrend in the unemployment rate has ended (the three-month average rate continued to rise in December) with hiring demand (job openings) still running well below year-ago levels.

“The Bank of Canada already flagged in December that with interest rates no longer clearly at ‘restrictive’ levels, and inflation running back around the central bank’s 2% target, the pace of rate cuts will be more gradual, and contingent on the evolution of economic data, going forward. We continue to expect that ultimately the Bank of Canada will need to cut the overnight rate to slightly ‘stimulative’ levels this year, below the 2.25%-3.25% the [central bank] currently estimates as the likely range for the current neutral rate.”

Andrew Grantham, senior economist at CIBC Economics

“Overall, today’s report was clearly better than anticipated and, if mirrored by other data, could signal a slower pace of interest rate cuts ahead than we were previously anticipating. However, with rates still above the mid-point of the neutral range, unemployment elevated relative to a year ago, and huge uncertainty emanating from the threat of US tariffs, we continue to forecast a 25-basis-point reduction at the January meeting and a 2.25% trough for the overnight rate later this year.

“Despite the positive end to the year, the unemployment rate is still 1% higher than it was as 2024 began, signaling a buildup of slack within the economy. Because of that, we continue to expect further interest rate cuts from the Bank of Canada in 2025, including a 25-basis-point reduction at the next meeting later this month.

“Even though the unemployment rate ticked down in December, there was still evidence that elevated joblessness was more widespread among demographic groups than it was earlier in the year. Last April, all of the increase in unemployment relative to the same month of 2022 was driven by newcomers into the country or young people. In December, those two groups accounted for just over half of the rise in joblessness relative to 2022, with unemployment in other areas (including prime-aged persons living in Canada for more than 5 years) also now having risen relative to the post-pandemic lows.”

Tu Nguyen, economist at RSM Canada

“Average hourly wages rose 3.8% on a yearly basis, down from 4.1% in November and the 5% trend that persisted for a long time. While wage growth still hovers above inflation, the gap is narrowing, which is reflective of the cooler job market. This will give the Bank of Canada more confidence in continued price stability to cut interest rates later this month.

“The 56,000 additional full-time jobs, as well as the fact that job gains were spread out across industries, speak to the resilience of the Canadian economy.

“As price stability has been restored, more rate cuts are expected in the upcoming months. It is possible that the jumbo rate cuts in late 2024 helped boost employment, and more rate cuts are needed to further boost growth.”

James Orlando, director and senior economist at TD Economics

“This was as positive a labor market report as we could expect. Despite all the negative talk about Canada’s economy, the country keeps adding jobs. Importantly, these jobs were largely full-time, and in cyclically sensitive industries. The growth in hours worked was also encouraging, as this will help support the continued resurgence in consumer spending. Wage growth has also been moving towards the level that is consistent with inflation stabilizing around the Bank of Canada’s 2% target.

“Today’s report puts a January rate cut into question. Despite fears related to U.S. action against Canada, the Bank of Canada doesn’t make political calls on the outlook. However, post-inauguration on January 20, they may have sufficient information on whether lower interest rates are necessary to shore up the economy. This will need to be balanced against any reaction on the Canadian dollar, which might also provide a buffer on trade at that time.”

Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets

“Hiring moved into a higher gear in Canada during the final month of last year. The labor market added 91,000 jobs … in contrast with economists’ expectations, which saw only 25,000 new jobs added and the unemployment rate rising to 6.9%. Despite the sharp increase in employment, the 12-month rate of average hourly wages for all employees decelerated down to 3.8%, the slowest pace since May 2022.

“Given the still-elevated unemployment rate and the cooler wage readings, the latest labor market data still leave the Bank of Canada in a position to cut rates. With more aggressive tariff threats weighing on business confidence and the recent rise in global bond yields tightening domestic financial conditions since the last policy decision, our rates outlook remains intact. We still see the Bank of Canada cutting rates later this month, but then pausing in March. In our base case, which includes at least some tariffs on Canadian exports to the US, we still believe that the policy rate will need to fall to around 2.00% in this cycle.”

Bradley Saunders, North America economist at Capital Economics

“The huge gain in employment in December supports our view that labor market conditions are strengthening, despite the recent upward trend in the unemployment rate. While weakness in private sector hiring as well as political and trade uncertainty still gives reason to think the Bank of Canada will cut rates by 25 basis points at this month’s meeting, the odds of a pause have now clearly increased.

“The 91,000 rise in employment was the largest in two years and far above both the consensus forecast for a 25,000 gain and our own above-consensus 38,000 expectation. While an improvement on November’s figures, the breakdown again showed a larger rise in public sector employment (40,000) than private sector employment (27,000), which chimes with timelier indicators suggesting that private sector hiring slowed towards the end of last year.

“Overall, December’s Labor Force Survey supports our view that the labor market is strengthening, assuaging concerns around the recent upward trend in the unemployment rate. While we still believe the Bank of Canada will opt for a 25-basis-point rate cut at this month’s meeting, today’s data mean the decision will be finely balanced. Investors seem to agree with us on this, as the probability of the Bank pausing its easing cycle later this month implied by financial markets has risen to around 40%, from 30%, since the data’s release.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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