The Canadian and US labor markets tend to make very similar moves, and rarely diverge. This is one of those rare divergences, according to a new analysis from BMO Capital Markets. The bank’s chief economist is warning that Canadian employment is showing the worst divergence in nearly 25 years. It’s rare to see this kind of divergence, but when it happens a weak loonie isn’t far behind.
Canadian Employment Shows Worst Relative Performance Since 2001
Canada’s job market is eroding much faster than our neighbors to the South. The unemployment rate climbed 0.2 points to 6.9% in April, leaving it higher than pre-pandemic levels. It also happens to be 2.7 points higher than the US (4.2%), with modeling adjustments accounting for just one point. Even after accounting for the difference, Canada still trails the US by 1.7 points.
One of Canada’s largest banks suggests this issue may be more alarming than many realize. “… this is one of the worst relative performances by Canada’s job market since 2001,” explains BMO chief economist Douglas Porter.
Adding, “there were a couple wild outliers in the pandemic, but we should ignore those results.”
Diverging employment trends also mean diverging monetary policies. That may provide some foresight in loonie performance, and vice versa.
Canadian Job Market Divergence Accompanied By Weak Loonie
The bank looked over a half century of unemployment and loonie performance data. “Over the long sweep of the past 50 years, a wide gap in jobless rates has tended to be associated with extreme levels in the Canadian dollar as well,” explains Porter.
Source: Bank of Canada; BMO.
Adding, “Of course there are many factors that drive the exchange rate, but the chart suggests, simply, that a relatively weaker Canadian job market goes hand in hand with a weaker Canadian dollar, as one would expect. The link is a) a relatively more dovish BoC and/or b) a weak commodity price backdrop.”
Canada’s recent erosion in performance isn’t due entirely to the trade war. The trade war certainly didn’t help, but the above data shows the divergence in employment before anyone even suggested it was a possibility. Canada failed to address foundational issues now emerging: a productivity collapse since 2019, a growing dependence on high-debt, low-growth industries like real estate and public administration, and weak business investment (capex is just a third of the US rate).
Addressing these issues becomes harder and more destructive the longer they persist. Short-term band-aid solutions to prop up the inefficiencies may provide a short-term boost, but they come at the expense of sharper, harsher corrections.
Canada took a wrong turn and just kept on going.
Cue the guy who regularly jumps in saying rates MUST be lower and that immigration needs to ramp up in order to support real estate.
Strong loonie is the path forward since it can be deflationary in the context of USD driven inflation.
Increase productivity-driven incentives over financial engineering.
Can’t do it with a deficit driven gov since the real burden of debt would rise. In this context, you serve Canada’s government, not the other way around.
Don’t expect policy to change.
Great blog as usual, Daniel.
For some unaccountable reason StatCan doesn’t publish seasonally adjusted estimates of its alternative measures of unemployment. Nevertheless, the R3 measure, which tries to calculate an unemployment rate series comparable to US methods, was at 5.9% in April, as opposed to 3.9% for the US unadjusted for seasonality. This is the highest discrepancy between the two rates since April 2001, comparing only for the month of April. Then the Canadian unemployment rate was 6.6% and the American unemployment rate was 2.4 percentage points lower.
Oooo. This is an excellent tip. Does this mean the gap is actually much larger, and the 1% accounted for by methodology is wishful thinking?
So lets considrr that until trumps.performance on tariffs, canadas dollar was in freefall. Canada has not been able to sustain any econoomic growth beyond inflation for almost a decade now.
So the loonie is measuring that while canada has great wealth in resources (energy alone is 190tr value), this govt has wasred that with nonsense like ev plants and govt subsidies for banks?
Now we have a almost majority for a govt that hasnt a clue how to grow tge economy, but does seem fixated on preserving welfartario as the only economic priority?
If we look at trade, welfartario runs almost as big a trade deficit as alberta has a surplus, 200+b per year usd?
If we remove welfartario from trade data, canadas rrade surplus is huge, 350B?
Add to that that one in four people there work in govt and another 20% in qyasi govt like financial services, and we have a mess. Effectively under carney, all the productivity in canada ends up beimg wasted in on?
Actually, Amir, unadjusted for seasonal variation, the Canadian unemployment rate declined from 6.5% in March to 6.2% in April, not surprising given our climate. So the adjustment to US concepts reduced the March unemployment rate to 6.1%, a difference of 0.4 percentage points and the April unemployment rate to 5.9%, a difference of 0.3 percentage points. This appears reasonable to me. Constance Sorrentino, while a BLS employee, wrote a June 2020 paper, “International unemployment rates: how comparable are they?” which is still I believe broadly accurate after all of these years. The US working age population starts at 16 years old instead of 15 years old, which pushes up the Canadian unemployment rate. The US definition requires active job search to qualify as unemployed; the Canadian definition treats passive job searchers as unemployed. I refer you to Sorrentino for the details. My main point was that I thought StatCan should seasonally adjust this very useful R3 series as well as the other alternative unemployment rate series.