However, the reopening of the Canadian economy has been creaky, owing to supply constraints and difficulty in filling job vacancies in sectors that require high-contact interfaces, especially with the concern regarding a fourth wave of the delta variant. Nevertheless, today’s LFS indicated that employment grew last month by 90,200, the third consecutive monthly gain, further closing the pandemic gap. Employment is now within 156,000 (-0.8%) of its February level, the closest since the onset of the pandemic. Moreover, most of the net new jobs were in full-time work. Increases were mainly in the service sector, led by accommodation and food services.

The adjusted unemployment rate—which includes discouraged workers–those who wanted a job but did not look for one—was 9.1% in August, down 0.4 percentage points from one month earlier.

Employment increased in Ontario, Alberta, Saskatchewan and Nova Scotia in August. All other provinces recorded little or no change. For the third consecutive month, British Columbia was the lone province with employment above its pre-pandemic level. Compared with February 2020, the employment gap was largest in Prince Edward Island (-3.4%) and New Brunswick (-2.7%). The table below shows the jobless rates by province.

The Bank of Canada this week once again suggested that it would not begin to tighten monetary policy until the economy returned to full capacity utilization, which they estimate will not be until at least the second half of next year. Employment will need to surpass pre-pandemic levels before complete recovery is declared because the population had grown since the start of the crisis 18 months ago.

Although August was another solid month for the jobs market, there is a wide disparity across sectors of the job market in the degree to which they have recovered from the effects of the pandemic. The table below shows the employment change in percentage terms by sector compared with February 2020.

Sectors where remote work has been widespread–such as professional, scientific and technical services, public administration, finance, insurance and real estate–have seen a net gain in employment. However, in high-touch sectors that were deemed nonessential, the jobs recovery has been far more constrained. This is especially true in agriculture, accommodation and food services, and recreation.

Financial conditions remain highly accommodative around the globe. And the Bank today continued to assert that the rise in inflation above 3% is expected, “boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen but by less than the CPI.”

The Governing Council again stated the Canadian economy still has considerable excess capacity, and the recovery continues to require extraordinary monetary policy support. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” Concerning forward guidance, the Bank said, “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022.” This seems to be a placeholder statement, allowing the Bank to reassess the outlook next month, possibly delaying the guidance if the economy continues to perform below their July projection.

Similarly, the Bank maintains its Quantitative Easing program at the current pace of purchasing $2 billion per week of Government of Canada (GoC) bonds, keeping interest rates low across the yield curve. “Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective”.

Bottom Line

Only time will tell if the Bank of Canada is correct in believing that inflation pressures are temporary. Financial markets will remain sensitive to incoming data, but bond markets seem willing to accept their view for now. The 5-year GoC bond yield has edged down from its recent peak of 1.0% posted on June 28th to a current level of .80%. In contrast, the Canadian dollar had weakened significantly since late June when it was over US$0.825 to US$0.787 this morning. Clearly, the Bank of Canada is committed to keeping Canadian interest rates low for the foreseeable future.

The next Bank of Canada policy decision date is October 27th. Stay tuned for the Canadian employment report this Friday.

The weak GDP data reduces the odds of the Bank of Canada tapering their bond purchases at their policy meeting on September 8th. It also highlights the output gap–the degree to which the economy remains below full economic capacity–remains a big issue. The Bank has forecast the gap to close by the middle of 2022. While that remains uncertain, we continue to expect growth to rebound in the third quarter.

Increases in investment in business inventories, government final consumption expenditures, business investment in machinery and equipment, and investment in new home construction and renovation were not sufficient to offset the declines in exports (-4.0%) and homeownership transfer costs (-17.7%), which include all costs associated with the transfer of a residential asset from one owner to another.

Housing investment reshapes the economy

Since the third quarter of 2020, housing investment has emerged as the predominant contributor to economic activities and capital stock—with residential capital stock surpassing non-residential capital stock. Moreover, the average housing investment for the previous four quarters was 17% higher than the average over the last five years.

Housing Investment

After taking on $62.3 billion of residential mortgage debt in the last half of 2020, households added $84.2 billion more residential housing debt in the first half of 2021.

Supply chain disruptions continue to impact motor vehicles

Shortages of microchips and other inputs curtailed trade in motor vehicles and domestic consumption. Household purchases of new passenger cars (-7.2%) and trucks, vans and sport utility vehicles (-1.6%) decreased, while business investment in medium and heavy trucks, buses and other motor vehicles fell 34.2%. Longer plant shutdowns because of international supply chain disruptions have constrained imports of parts and led to significant decreases in exports. Low production of motor vehicles and parts resulted in an 18.9% drop in exports of passenger cars and light trucks and an 8.7% decline in tires, motor vehicle engines and parts exports. Inventories had another quarter of significant drawdowns in response to supply needs.

Double-digit household savings rate continues

The modest rise in household spending (+0.7%, in nominal terms) was outpaced by growth in disposable income (+2.2%), leaving households with more net savings than in the previous quarter. Household incomes were primarily bolstered by employees’ rising compensation and increasing transfers received from the government, which were partially offset by a 2.8% rise in personal income taxes.

Consequently, the savings rate reached 14.2%—the fifth consecutive quarter with a double-digit savings rate—as various pandemic-related restrictions and uncertainty continued to limit the scope of household consumption. The household savings rate is aggregated across all income brackets; in general, savings rates are greater in higher income brackets.

Today’s release is, in some respects, ‘ancient history.’ It is still widely expected that the economy will rebound in the third quarter. With the surge in household savings and continued growth in personal disposable income, pent-up demand is likely to boost consumption for the remainder of this year. All eyes will be on the August employment report released Friday, September 10th. The Bank of Canada will likely continue to proceed cautiously. Another tapering of the bond-buying program will come under scrutiny, and forward guidance will continue to suggest no rate hikes until the second half of next year.