Canada's unemployment rate rises to 6.6%, sparking concerns

Canada's unemployment rate is just the latest economic indicator flashing red. It climbed to 6.6 per cent last month. Excluding the volatile swings of the COVID era, that's the highest it's been since 2017.

And economists say the malaise in the jobs market is deepening.

"Layoffs are also rising under the surface. And a down-drift in job openings signals that hiring demand from businesses is still slowing," wrote RBC's deputy chief economist Nathan Janzen in a note to clients.

In fact, the whole economy is still slowing.

For more than two years, inflation has been the dominating feature on the landscape. The central bank took extraordinary measures to try to get price growth under control. It jacked up interest rates in an attempt to slow the economy.

And it worked. Canada's GDP growth slowed to around zero, teetering on the edge of a contraction, but avoided slipping into an outright recession. Inflation is now firmly within the Bank of Canada's preferred window of one to three per cent and within spitting distance of the bank's target of two per cent.

The problem is, the economy has continued to weaken even though inflation is now largely under control.

Per capita GDP has been negative in seven of the last eight quarters. And the latest monthly numbers show any momentum gained at the start of the year is waning.

So, now the Bank of Canada is in a race against time. It's hoping interest rate cuts can work their way into the economy before Canada slips into a recession. 

"With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much," said Bank of Canada governor Tiff Macklem on Wednesday.

It generally takes about 18 months for changes in interest rates to fully work their way into the economy. The last interest rate increase came in July of 2023, so we still haven't fully absorbed the economic impact of the rate hikes.

The central bank has cut three times this year. That's the first time since the financial crisis in 2009 that the central bank cut rates three times in a row. Economists expect the bank will lower interest rates in October and again in December.

"For now, we look for the Bank to cut rates to 3.5 per cent by January, and then to three per cent by next June, but the risks tilt to the Bank going faster than that, and potentially further," wrote BMO's chief economist Douglas Porter in a note to clients.

The question is whether those cuts will work fast enough to stave off a recession.