Unemployment may be on the rise, but the economy isn’t necessarily headed for a recession, says Desjardins Group.
While a rising jobless rate can often signal looming economic trouble, the possibility of a soft landing for Canada may still be in the cards, Desjardins wrote in a report.
“One clue is that the rising unemployment rate has not been driven by job losses,” the report said. Instead, growing joblessness is largely “the result of newcomers not finding work upon arrival.”
“Outside of the pandemic, the jobless rate for new entrants hasn’t been this high since the oil price crash in 2014–15 pummelled Canada’s labour market,” Desjardins said. “Conversely, the unemployment rate remains very low for residents born here and those who immigrated more than 10 years ago.”
New workers entering the labour force from both high school and post-secondary education are also facing an extremely tough market.
“The job finding rate, which measures the likelihood of an unemployed person finding work, is hovering around levels seen during the financial crisis,” the report noted.
The good news for the economy overall is the drivers of the current rise in the unemployment rate don’t point to a recession.
“The absence of mass layoffs has allowed for a gradual rise in the unemployment rate, in contrast to the spikes that have characterized episodes of recession,” Desjardins said.
The signs of continued inflation easing remain intact, allowing monetary policymakers to keep dropping interest rates.
“At least for now, governments and businesses can breathe a sigh of relief,” the report said. “The labour market is cooling enough to keep rate cuts coming, but not so much that a recession is knocking on the door.”
If rates keep coming down, it’s possible the economy will experience a soft landing, Desjardins suggested. It forecast the Bank of Canada will cut rates three more times this year, by 25 basis points each time, including on July 24.
“This forecast reflects the reduced appetite for hiring we’ve witnessed recently, consistent with a regression from the very tight labour market seen in recent years,” Desjardins said. “That’s in line with the gradual easing in monetary policy the Bank of Canada has signalled and in contrast to the more rapid rate-cutting cycles that have tended to occur when the economy enters a recession.”