The Canadian and US labor markets tend to make very similar moves, and rarely diverge. This is one of those rare divergences, according to a new analysis from BMO Capital Markets. The bank’s chief economist is warning that Canadian employment is showing the worst divergence in nearly 25 years. It’s rare to see this kind of divergence, but when it happens a weak loonie isn’t far behind.
Canadian Employment Shows Worst Relative Performance Since 2001
Canada’s job market is eroding much faster than our neighbors to the South. The unemployment rate climbed 0.2 points to 6.9% in April, leaving it higher than pre-pandemic levels. It also happens to be 2.7 points higher than the US (4.2%), with modeling adjustments accounting for just one point. Even after accounting for the difference, Canada still trails the US by 1.7 points.
One of Canada’s largest banks suggests this issue may be more alarming than many realize. “… this is one of the worst relative performances by Canada’s job market since 2001,” explains BMO chief economist Douglas Porter.
Adding, “there were a couple wild outliers in the pandemic, but we should ignore those results.”
Diverging employment trends also mean diverging monetary policies. That may provide some foresight in loonie performance, and vice versa.
Canadian Job Market Divergence Accompanied By Weak Loonie
The bank looked over a half century of unemployment and loonie performance data. “Over the long sweep of the past 50 years, a wide gap in jobless rates has tended to be associated with extreme levels in the Canadian dollar as well,” explains Porter.
Source: Bank of Canada; BMO.
Adding, “Of course there are many factors that drive the exchange rate, but the chart suggests, simply, that a relatively weaker Canadian job market goes hand in hand with a weaker Canadian dollar, as one would expect. The link is a) a relatively more dovish BoC and/or b) a weak commodity price backdrop.”
Canada’s recent erosion in performance isn’t due entirely to the trade war. The trade war certainly didn’t help, but the above data shows the divergence in employment before anyone even suggested it was a possibility. Canada failed to address foundational issues now emerging: a productivity collapse since 2019, a growing dependence on high-debt, low-growth industries like real estate and public administration, and weak business investment (capex is just a third of the US rate).
Addressing these issues becomes harder and more destructive the longer they persist. Short-term band-aid solutions to prop up the inefficiencies may provide a short-term boost, but they come at the expense of sharper, harsher corrections.