BoC’s Macklem says Canadian economy appears to be on track for soft landing

Bank of Canada governor Tiff Macklem said the Canadian economy appears to be on track for a soft landing where inflation falls back to the bank’s target without a major spike in unemployment.

At the same time, the continuing slowdown in the labour market is hitting some groups harder than others, especially new Canadians and young people, Mr. Macklem said in a speech to the Winnipeg Chamber of Commerce on Monday.

The unemployment rate in Canada has risen more than a percentage point over the past year, hitting 6.2 per cent in May, just above pre-pandemic levels. There has not been a large increase in layoffs. But businesses have pulled back on hiring as high interest rates have weighed on consumer spending and dulled corporate investment.

“This is the soft-landing scenario,” Mr. Macklem said. “It has always been a narrow path, and we have yet to fully stick the landing. Looking forward, the unemployment rate could rise further. … But we continue to think that we don’t need a large rise in the unemployment rate to get inflation back to the 2-per-cent target.”

The speech comes two weeks after the bank lowered its policy interest rate to 4.75 per cent from 5 per cent, the first rate cut in four years.

Mr. Macklem offered few hints about the timing of further rate cuts. But his focus on how the labour market has come into “better balance” suggests policy makers are increasingly comfortable that inflationary pressures are easing.

The rapid pace of wage growth, which can feed into inflation as companies raise prices to cover costs, remains a concern. Average hourly wages were up 4.7 per cent year-over-year in April compared to an inflation rate of 2.7 per cent. Mr. Macklem said he “will be looking for wage growth to moderate further.”

However, he also said the bank is focusing on certain measures of wage growth that have slowed more than the overall rate. That suggests the bank may be less concerned about wage pressures than markets expect.

“Ultimately, the Bank of Canada seems content with the progress on the labour market, although they want to see more of it,” Desjardins economist Tiago Figueiredo wrote in a note to clients about the speech.

“Barring any major surprises, we continue to see the Bank of Canada cutting rates by another 25 basis points in July,” Mr. Figueiredo wrote, noting that the bank will receive two key pieces of economic data this week – the May inflation numbers on Tuesday and the April GDP numbers on Friday.

While the speech highlighted the “smooth” labour market cooling – companies have stopped posting jobs instead of laying people off outright – Mr. Macklem said the slowdown in hiring has hit young people and new Canadians particularly hard.

“With fewer job vacancies, it’s taking longer for young people entering the labour market to find a job, and their unemployment rate has risen. It’s now about 2 percentage points above its pre-pandemic average,” he said.

Likewise, job creation has failed to keep pace with the historic level of immigration over the past year, leaving more new immigrants without work.

This dynamic could help explain growing signs of financial stress among renters, who are often younger workers and newcomers. While mortgage delinquency rates remain relatively low, late payments on credit cards and auto loans are above pre-pandemic levels, especially for renters.

Looking further ahead, Mr. Macklem used his podium to highlight Canada’s lagging productivity (output per worker), which he called the country’s “Achilles’ heel.”

This has become a major theme for central bank officials. Senior deputy governor Carolyn Rogers created a stir several months ago by calling poor productivity and low levels of business investment in machinery and equipment an “emergency.”

Mr. Macklem said Canada has been good at growing its economy by increasing the number of workers, but not by increasing output per worker. This needs to change for the Canadian standard of living to keep improving as the population ages and the country bumps up against the “limits” of immigration policy, he said in a news conference after the speech.

He said that politicians and policy makers need to get a grip on why business investment is relatively weak in Canada. And he offered a few ideas to improve the investment climate, including lowering interprovincial trade barriers and speeding up regulatory approvals for companies and projects.

“There are also a whole range of bigger questions that I think are going to need more thought,” he said. “The role of multinational versus home headquartered businesses. Investing in houses, investing in machinery and equipment. There are a number of big questions. I don’t have all the answers but I think we need to collectively be thinking about those.”