Economists see unemployment ticking higher as economic headwinds persist
Canada’s labour market was relatively unchanged in May compared with April, adding just shy of 9,000 jobs to the economy, while the unemployment rate ticked higher at 7%.
The largest net losses were in manufacturing (-12k), transport and warehousing (-16k) and public administration (-32k), Statistics Canada reported.
Wholesale and retail trade gained by a net 43,000 while finance, insurance, real estate, rental and leasing added 12,000 and continued a trend that started in October 2024 and has seen a net 79,000 jobs created in the sector over that time.
Average hours worked were little changed while wage growth remained subdued year-over-year at 3.4%.
But with the Canadian economy still uncertain, especially due to trade tensions with the US, leading economists expect further weakness in the labour market which is likely to require interest rate cuts from the Bank of Canada.
“Overall, data is consistent with our view that labour market is softening but not collapsing,” said Claire Fan from RBC Economics. “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.”
TD Economics’ Leslie Preston notes that last week “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.”
Andrew Grantham at CIBC Economics says that the data shows that the Canadian economy is not yet contracting but it also is not achieving its potential and that may mean rising unemployment ahead.
“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 stabilise conditions before year-end and bring a reduction in the unemployment rate again in 2026,” Grantham concluded.
At BMO, Doug Porter said that the strength in private sector and full-time jobs kept the labour report to a “passing grade” but said that the increase in the unemployment rate is a “loud warning bell” that suggests the BoC will need to cut interest rates further.
Meanwhile, Scotiabank’s Derek Holt said he was “shocked” that the labour report was so strong, especially given the decline in public sector jobs which was expected post-election. He noted that, without the decline in public roles, the economy added 41,000 jobs.
However, he expects that the BoC will not be swayed by the stats. “Not because they’re bad; they’re actually quite good. But because their reaction function has signalled a stronger focus upon the next two CPI reports notwithstanding how contradictory its guidance is right now,” he said.
