Canada's unemployment rate in May at almost nine-year high outside of COVID years

Canada's unemployment rate rose to 7% in May, the highest level in almost nine years outside of the pandemic, with 1.6 million jobless individuals, driven by near-flat employment growth amid a rising population. The increase, a third consecutive monthly rise, reflects growing difficulties in finding work, with the average duration of unemployment increasing to 21.8 weeks from 18.4 weeks a year ago; analysts attribute this to the impact of U.S. tariffs, which the Bank of Canada has warned are creating uncertainty and hurting investment and hiring.

Analysis

Canada's labor market displayed notable weakening in May, with the unemployment rate escalating to 7.0%, a third consecutive monthly increase and the highest level observed in nearly nine years, excluding the COVID-19 pandemic distortions. This rise translates to 1.6 million individuals without employment, marking an almost 14% increase compared to the previous year. The deterioration is primarily attributed to virtually flat employment growth, with a meager addition of only 8,800 jobs against a backdrop of a rising population, falling short of analysts' expectations of a 12,500 job decline. This underscores increasing difficulties for job seekers, as evidenced by the average duration of unemployment extending to 21.8 weeks from 18.4 weeks a year prior. The impact of U.S. tariffs is a significant contributing factor, with the Bank of Canada highlighting that trade uncertainties are negatively affecting investment, hiring intentions, and risking further job losses, a trend analysts had anticipated. While wholesale and retail trade saw employment gains, these were offset by declines in manufacturing and government sectors, the latter partly due to the cessation of temporary election-related hiring. Despite the weakening labor market, average hourly wage growth for permanent employees remained stable at 3.5% in May, a critical data point for the Bank of Canada's inflation assessment.

Key Decisions for Investors

• Investors should exercise caution regarding Canadian-exposed assets given the deteriorating labor market conditions and the negative impact of U.S. tariffs.
• Monitor upcoming Bank of Canada statements closely for any shifts in monetary policy stance, particularly how sustained wage growth amidst rising unemployment might influence their decisions.
• Consider potential continued underperformance in sectors sensitive to trade protectionism and investment uncertainty, such as manufacturing, until there is greater clarity on U.S.-Canada trade relations.
• Watch for any developments or resolutions regarding U.S. tariffs, as these are a primary driver of the current economic headwinds and labor market weakness in Canada.