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Last week, Sylvain Leduc, deputy governor at the Bank of Canada, gave a rare speech in Quebec City. At about the same time in Ottawa, Prime Minister Justin Trudeau made his move in the trade war with U.S. President Donald Trump.
Needless to say, Leduc, who, like the other deputies on governing council, only gets to speak a couple of times a year, was robbed of his glory. One reporter — one! — showed up at the press conference that followed the speech. And you can guess what that journalist wanted to talk about first.
It’s unfortunate Leduc’s remarks received so little attention because that speech is currently the best guide to what the central bank will be watching between now and its next policy decision on July 11.
BofC Governor Stephen Poloz and his deputies insist they are “data dependent,” which means their plans for interest rates will be guided by information as it becomes available, not a predetermined path. A diligent watcher of monetary policy will have taken note of the indicators Leduc mentioned and start charting their evolution, assuming he or she hadn’t been doing so already.
So let’s do some of that analysis. This week brought updates of several key indicators, including new hiring figures for May. Those data alone cement the case for an interest-rate increase next month.
After recording out-sized growth of three per cent in 2017, Canada’s economy has slowed to a more sustainable pace of around two per cent this year, and it appears to have plateaued.
Statistics Canada reported June 8 that the unemployment rate was unchanged at 5.8 per cent for the fourth consecutive month in May, and net hiring was essentially unchanged for the second straight month.
Some will find evidence of stagnation disappointing. Yet it’s important to keep in mind that hiring is stalling at a level that is consistent with full employment, or the state at which that those who want a job have one. Canada’s economy is fine.
What interests the central bank these days is whether a longer period of low interest rates might strengthen the labour market at the margins. Leduc said in Quebec City that mediocre wage growth and levels of long-term unemployment that remained “significantly higher” than a decade ago suggested that there still was slack in the economy.
The latest StatCan numbers show that wages are becoming less mediocre, and that the number of idle workers who have been unemployed for longer than six months is starting to decline. The former is especially important because research shows that the longer a willing worker is stranded, the more difficult it becomes for her or him to find employment that matches her or his capability. This tends to happen after recession or periods of weak economic growth — economists call it “scarring” — and Poloz has made clear he will do what he can to reverse the effect, so long as there is no upward pressure on inflation.
You have to do a little extra work to pull the long-term jobless rates from StatCan’s monthly reports. Brendon Bernard, a Toronto-based economist at Indeed, the web-based hiring firm, calculated that the long-term unemployment rate, or the percentage of total unemployed men and women who have been looking for work unsuccessfully for 27 weeks or longer, was 17.9 per cent in May compared with 20.2 per cent a year earlier.
That’s probably still higher than Poloz would like; the rate was around 12 per cent ahead of the financial crisis a decade ago. Still, the trend suggests the labour market is getting stronger, despite the stall in overall hiring. “There’s absolutely room for improvement in reducing long-term unemployment, but, encouragingly, we’ve seen a recent noticeable drop,” said Bernard, a former economist at the federal Finance Department.
There also is movement in wages.
Average hourly pay jumped 3.9 per cent from a year ago, the biggest increase since April 2009. Wages correlate with inflation, so the new figure will leave an impression at the Bank of Canada. Still, Leduc was somewhat dismissive of the wage number in StatCan’s monthly survey of the labour market last week. “The signal we get from this reading is muddied by the high volatility of this series and the fact that last year at the same time wages were surprisingly weak,” he said.
The Bank of Canada created its own measure of wage growth that combines several indicators to create a single index. That gauge was reading about 2.6 per cent at the end of the first quarter, Leduc said. That’s a considerable increase from its low of about one per cent in the middle of 2016, but still weaker than the three-per-cent rate that Leduc said would be consistent with the current level of economic growth. Changes to the minimum wage in several provinces also could be masking a weaker underlying trend.
“Wages are rising somewhat more slowly than we would expect to see in an economy operating at capacity,” Leduc said.
That point of view won’t have changed after one report. Bottom line: the latest jobs data support a quarter-point increase in benchmark rate in July, but they don’t demand any more than that for the time being.
Alex Mustard, from Peterborough, has been awarded the MBE for services to underwater photography.