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Canada’s labour market is in the early stages of a slowdown, and could end up in one of three scenarios: perfect, hard or “softish,” economists at Toronto-Dominion Bank say.
“By our estimates, the unemployment rate needs to reach six per cent (if not higher) to bring balance to the job market,” James Orlando, senior economist at TD Economics, and Tarek Attia, a research analyst, said in the report.
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The Bank of Canada is looking for the jobs market to cool to help bring inflation back to its two per cent target. A shortage of workers in the wake of the pandemic helped stoke demand for labour, pushing wages higher and lifting prices. That resulted in the consumer price index hitting a 40-year high last summer. Inflation decelerated to 3.3 per cent in July.
Here are TD’s three scenarios for the employment market:
The perfect landing
Probability: 10-20 per cent
Unemployment rate peak: Six per cent
In what Orlando and Attia called a “fairy tale scenario,” the jobs market would slowly reach balance in the spring of 2024, as the number of people available to work rises more quickly than still decent demand for workers.
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“The key with this scenario is that total employment may still eke out positive but moderate net gains as firms attempt to retain employees,” the economist said.
Workers would switch jobs less — Statistics Canada’s latest labour force survey shows job churn eased in August — resulting in less bargaining power and a drop in wage increases. Still, pay hikes wouldn’t be expected to reach normal levels until the end of 2024.
That would result in a longer period of higher spending and drag out the fight to tame inflation. But, the economists don’t give this scenario high odds due Canadians’ elevated debt loads and the impacts of high interest rates on their wallets.
The hard landing
Probability: 20-30 per cent
Unemployment rate peak: Seven to nine per cent
This scenario would be the byproduct of a deep recession as interest rate hikes prove “more powerful than expected,” the economists said.
The resulting economic pullback would result in “hefty” job losses of possibly as many as 500,000 positions based on average losses during the last four recessions in Canada.
Inflation would quickly be snuffed out “but widespread job cuts would result in a lengthy recovery,” they said.
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Still, Orlando and Attia argue there are factors protecting against a hard landing. Those factors include Canadians’ $100 billion in excess savings, a growing population that increases labour supply but also creates demand, and the fact there are industries where employment levels have yet to fully recover from the pandemic, including the accommodation/food services and natural resources sectors. In this scenario, those sectors are less likely to let workers go because staffing levels are already low.
“Industries such as construction, trade, transport, and health care have a long pipeline of projects and firms are likely to make all attempts to retain workers, if not add to their workforce,” the economists wrote.
The ‘softish’ or baseline landing
Probability: 60 per cent
Unemployment rate peak: 6.7 per cent
TD forecasts net job losses of 50,000 starting at the end of the year, with the jobless rate hitting its peak over the next year.
“While there are currently buffers in place to prevent a hard landing, the economy is entering a delicate stage — one that will require greater attention from the Bank of Canada as it attempts to land the plane as softly as possible,” Orlando and Attia said.
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The prospect that eurozone interest rate hikes may be over will do little to soften the blow as the European Central Bank tightens the screws on a faltering economy, Bloomberg reports.
Thursday’s move to raise borrowing costs for a tenth consecutive time marks the entry into new territory for policymakers, led by president Christine Lagarde, as their visible hesitation points to awareness of how they’re dialing up the pain to pummel inflation.
The decision to bring the deposit rate to four per cent came with the vague hope of bringing consumer-price growth below two per cent at the very end of the ECB’s outlook in 2025.
- International Trade Minister Mary Ng hosts her provincial and territorial counterparts in Ottawa
- Canadian Real Estate Association releases national August home sales figures at 10 a.m. EDT
- Follow along with the Financial Post’s live news blog to get breaking news as it happens, all day long.
- Today’s data: International securities transactions, manufacturing sales, existing home sales
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