Economist: Bank of Canada may rely on prospective statistics despite job growth

 

TD Bank’s Deputy Chief Economist, Derek Burleton, has praised the recent consecutive months of impressive job gains in Canada, which he calls “incredible” given the Bank of Canada’s interest rate hikes over the past year in an effort to reduce inflation. However, he also predicts a slow-down in the job market later this year and believes the Bank of Canada’s upcoming April 12 rate decision will focus more on forward-looking sentiment data.

 

Burleton thinks that as data corrects for pandemic company closures and behavioral changes, the most recent jobs numbers may in part be a "statistical mirage.  He acknowledges that employment is a lagging indicator, and while it may take longer, he expects to see more visible impacts on hiring in the future.

 

The Bank of Canada has been concerned about labour market tightness during its interest rate tightening policy cycle. However, the bank expects pressures in the labour market to ease in the “next couple of quarters,” which should moderate wage growth and make it more difficult for businesses to pass costs down to consumers.

 

According to survey data from the Bank of Canada, consumers and businesses appear to be bracing for a possible mild recession, with business sentiment turning negative for the first time since 2020. Burleton suspects this is due to the recent jobs numbers being a “statistical illusion.”

 

Despite the recent positive jobs numbers, Burleton expects the Bank of Canada to put more weight on forward-looking sentiment data, rather than past performance. He also believes that the recent outsize March jobs gain “speaks to how extended this (monetary policy) cycle is going to be.”

 

 

 

However, Burleton warned that the job market is likely to slow down later this year, and therefore expects the Bank of Canada’s April 12 rate decision to weigh future expectations more heavily. He told BNN Bloomberg in a television interview that he expects the Bank of Canada to put more weight on their forward-looking sentiment data.

 

Burleton added that the recent jobs numbers may be partly a “statistical illusion” due to data readjustments from pandemic business shutdowns and behavioural shifts. Nonetheless, he believes that the outsize March jobs gain “speaks to how extended this (monetary policy) cycle is going to be.”

 

The central bank held its key overnight rate at 4.5% last month, following consecutive increases from 0.25% in March 2022. The Bank of Canada had been concerned about the tightness in the labor market during its interest rate tightening policy cycle. However, the last rate decision statement by the central bank indicated that it expects pressures in the labor market to ease in the “next couple of quarters,” which should “curb wage growth" and make it harder for companies to pass cost increases on to customers.

 

Survey data from the Bank of Canada released this week showed that businesses and consumers are preparing for a possible mild recession. The data showed business sentiment turning negative for the first time since 2020.

 

Burleton does not believe the recent job gains will influence the Bank of Canada’s outlook on inflation, which has been encouragingly coming down. Nonetheless, he acknowledges that it is just a matter of time before hiring begins to slow down as employment is a lagging indicator.