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Omicron a new type of challenge for labour market

The Omicron wave will be characterised more by heightened absenteeism from work than previous waves. This raises the risk that the hit to activity will be larger than current restrictions alone might imply.
Stephen Brown Senior Canada Economist
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Canada Economics Weekly

Economy losing momentum

While the apparent contraction in GDP in May appears to have been partly due to temporary factors, it also reflects the impact of the surge in interest rates on housing. With the business surveys for June also showing a loss of broader momentum, the economy may be slowing even sooner than we anticipated.

We are sending the Weekly early this week as our Toronto office is closed for the Canada Day holiday on Friday. Happy Canada Day!

30 June 2022

Canada Data Response

GDP by Industry (Apr.)

The preliminary estimate suggests that the healthy 0.3% m/m rise in GDP in April was followed by a shock 0.2% contraction in May but, as this appears to have been partly due to temporary factors, it probably won’t stop the Bank of Canada from enacting a larger 75 bp interest rate hike next month.

30 June 2022

Canada Chart Book

Tight labour market pushing up wages

The tight labour market is putting upward pressure on wages, with the Labour Force Survey showing a strong 1.0% m/m rise in average hourly earnings in May. While the annual rate of wage growth, at 3.9% y/y, remained lower than before the pandemic, base effects mean it is likely to accelerate to closer to 6% over the second half of 2022. All this adds to the pressure for the Bank of Canada to rapidly tighten policy, particularly as the current weak rate of productivity growth suggests that there is minimal scope for businesses to absorb higher wage costs. We expect the Bank to raise its policy rate by 75 bp in July and follow that with a further 50 bp hike in September and a 25 bp hike in October, to take the policy rate to 3.0%. By then, we think the weakness in the housing market and a sharp slowdown in employment growth will be enough to cause the Bank to pause its tightening cycle, and ultimately remain on the side lines as GDP growth slows below its long-run potential in 2023.

29 June 2022

More from Stephen Brown

Canada Data Response

Labour Force Survey (Dec.)

The strength of employment in December is mainly because the LFS reference week preceded the onset of the Omicron wave. Nevertheless, the fall in hours worked is probably a taste of what is to come, as more workers were forced to isolate. We expect both employment and hours worked to fall this month.

7 January 2022

Canada Economics Update

Five key calls and five unknowns for Canada in 2022

We expect GDP to grow strongly once the current restrictions are eased, but we are sceptical that either GDP growth or inflation will be as high this year as widely anticipated. This leads us to think the Bank of Canada will hike interest rates by 75 bp in 2022, which is 25bp less than currently implied by markets.

6 January 2022
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