This morning, we learned that Canada’s unemployment rate rose to 6.8% in November, the highest since September 2021 and January 2017. It is now up 200 basis points (bps) from the cycle low of 4.8% in June 2022 and has never increased this much outside of a recession. Of the 50,000 new jobs created, 45,000 came from the government sector.
With the masses struggling to make ends meet, the incoming Trump administration has vowed to add trade tariffs that would further inflate the price of goods while suppressing economic activity (stagflationary). It remains to be seen whether cooler heads and rational negotiations will prevail.
Former BoC governor (2013-2020) Stephen Poloz opined in a speech this week that Canada was already in a recession and that only unusually high immigration had skewed economic data into a mirage of positive momentum:
“I wouldn’t even call it a technical [recession]. A technical one is a superficial definition that you have two-quarters of negative growth in a row, and we haven’t had that. But the reason is because we’ve been swamped with new immigrants who buy the basics in life, and that boosts our consumption enough.”
Poloz pointed to the lingering high cost of living as a factor hindering consumer spending and said the recent big drop in the inflation rate usually only occurs during recessions. He also noted that lingering inflation makes it harder for central banks to ease interest rates. See Canada is in a Recession, says former BoC Governor:
Poloz said those tariffs could put the Bank of Canada and other global central banks in an “awkward place,” potentially requiring rates to stay higher for longer even as the economy slows.
I think most central banks are going to say, ‘I’ve got to be worried about the inflation part,’” he said on the prospect of those tariffs coming into play, “and so that’s a recipe for deeper stagflation.
The BoC’s policy rate of 3.75% today is 100 bps below the US Fed rate of 4.75% and the widest divergence between the two central banks since April 2007. The negative spread makes Canada relatively less attractive, and the loonie has fallen to .71 USD—the lowest since the spring of 2020. A weak loonie can make Canadian exports more appealing but inflates the cost of imports and travel.
Upping inflationary risks, governments are trying to appease disgruntled masses with tax cuts and more handouts. This month, the Canadian government announced another round of ‘free’ cash in direct consumer transfers and consumption tax holidays. These initiatives can temporarily boost consumption but also inflation, reducing the BoC’s scope for lowering short-term interest rates. This could compound financial pressures amid rising government deficits, flat population growth, and a deteriorating trade and investment outlook.
While the Bank of Canada (BoC) has delivered 125 bps of monetary easing since July, lower Treasury prices (increasing fixed loan rates) have worked at cross purposes since mid-September by inflating Canadian interest costs. With unemployment rising and a household debt-to-income ratio of 180% (100% in America), relief can’t come fast enough.
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