I have bad good news for you.
Posted at 6:30am
A what? Good news turning out to be bad these days. It never occurred to me to tell you this, but here we are, the economic situation is changing, as is the interpretation we have of it.
On Friday, Statistics Canada said the job market remains strong with wages rising sharply. Specifically, 40,000 jobs were created in Canada in May, after 15,000 in April.
Permanent wages rose again in May by 4.5% after 3.4% in April.
It’s almost discouraging.
We’re sorry ? But yes, economists and financiers usually welcome such an increase, happy to see everyone working, earning better wages and paying taxes. The problem is that these elements are probably feeding the greatest enemy of today’s economy: inflation.
And that this runaway inflation is likely to prompt the Bank of Canada to raise interest rates even more, with its negative impact on the housing market, household finances and the stock market.
For example, yesterday the US Department of Labor announced that annual inflation in the United States rose to 8.6% in May, a 40-year high, beating expectations of 8.3%. The surge is widespread, affecting gas, groceries and everything else. Worse, the monthly jump between April and May is 1%, which translates to an annualized rate of about 12%. Ouch!
Result ? Stock markets plummeted, and not just a little. The S&P 500 index — the US market’s flagship index — fell 2.9% on Friday. This drop comes on top of the overall declines since January and has now reached nearly 19%.
Canada felt the effects of the crisis, with the S&P TSX Index falling 1.4% on Friday (down 4.5% since January).
Why these falls? Because investors fear these new signs of inflation will require more central bank action, erode corporate profit margins and eventually trigger a recession.
In short, all observers are waiting for the signal of an easing in the economy, employment, inflation, which means that the policies of the Bank of Canada and the US Federal Reserve are working, that the economy is about to soft-land rather than to overthrow.
“A slowdown in the hiring cycle would be welcome on both sides of the border,” said the SNB’s chief economist, Stéfane Marion.
According to him, it is difficult to predict a significant drop in inflation in the United States before the end of the summer, when China – still battered by COVID-19 – reopens its economy, which will bring relief to supply chains. Recent indicators point to another rate hike of at least 50 basis points in Canada in July, Mr. Marion believes.
However, recent news isn’t just “disheartening” when it comes to inflation. Overall employment rose on Friday, but the private sector lost 95,000 jobs in Canada.
Stéfane Marion sees this as a sign that the rise in interest rates is beginning to take hold and judges that companies are hiring fewer staff in view of rising costs and financing interest rates, a question of maintaining profit margins.
Still, we’ll have to be patient because, according to Bank of Canada Governor Tiff Macklem, “it’s going to be a year and a half to two years before that happens [les] instruments can have their full effect on the economy,” he explained to my colleague Hélène Baril on Thursday. By then, he believes, the inflation rate will have started to fall.
The major economic news releases released on Friday also call for nuance. First, the average wage increase of 4.5% for permanent jobs in Canada is not solely due to inflation.
Statistics Canada notes that the employment pool is not the same today as it was before the pandemic: there are more jobs in Canada in paid sectors (professional and technical services, finance, etc.) and fewer in less paid sectors (catering, accommodation, etc.) . ).
So the wage boom is also due to this change, this compositional effect, and not just inflation. Wages in professional and technical services have increased by about 12% in three years, compared to less than 9% in the accommodation and catering sector. These increases contrast with a jump in inflation of 10.5% over three years.
Last year’s wage increase of 4.5% is probably closer to 4% when this compositional effect is taken into account, estimates Stéfane Marion. In comparison, the jump in wages in the United States – excluding the composition effect – is around 6.6%.
Another aspect to consider: the notable differences between provinces in Canada. In particular, the annual wage increase in Quebec reached 6.9% in May compared to 3.3% in Ontario, estimates the Institut de la statistique du Québec.
There is probably a stronger compositional effect in Quebec than elsewhere, but the wage boom here is also explained by weak relative labor force growth (+1.3%) compared to Ontario (+3.4%), particularly immigrants, believes Mr. Marion.
It never occurred to me to tell you this, but here we are, in a way, we have to hope for job losses. Funny time!