Economists are getting mixed messages from recent employment data, but one thing is clear — despite the lack of clear job growth, wages are rising rapidly — which is bolstering inflation, and leading to the end of rate cuts, says National Bank Financial Inc. (NBF).
In a research note, NBF said that the market is anticipating Statistics Canada’s next release of Labour Force Survey data on Friday, coming in the wake of weak payroll data.
“These figures are eagerly awaited, as they will reveal whether the upturn of the last two months is confirmed or whether it was a statistical fluke,” it said. NBF added that recent strength in that data “contrasts with soft data showing a weak appetite for hiring.”
Indeed, NBF said over the past six months, employment is only growing in 41% of private sector industries, “which is a proportion usually seen only in recession.”
Yet, despite this weak trend, private sector wages have risen rapidly, it noted, “rising at an annualized rate of 5.5% over the last six months, a pace that is incompatible with bringing inflation back to target.”
In a separate report, NBF said that strong wage growth is boosting inflation, “particularly in the services sector, which is much more sensitive to wage pressures.”
That report points to a couple of possible explanations for the strength in wages, despite the weak labour demand, including workers — particularly unionized workers — that are engaged in wage negotiations, seeking to catch up to recent consumer inflation.
At the same time, the composition of unemployed workers may be a factor too — as the population of jobless workers includes a relatively high proportion of long-term unemployed, which “can be explained by a mismatch between their skills and those sought by employers, or by an erosion of their skills and employability.”
Against that backdrop, it’s appropriate for the Bank of Canada to stop cutting rates, it said.
“Given the current situation, which has stagflation overtones, we also believe that, for now, the best course of action is to suspend interest rate cuts,” it said. “We continue to believe that core inflation should moderate in the coming months amid excess supply, but the lack of progress so far on the inflation front calls for caution.”