Uptick in Wage Growth Raises Risk that
Interest Rates Remain Higher for Longer
Labour market beats expectations in 2023. Canada’s total employment held unchanged in December. The 43,000 rise in service employment was offset by a similar drop in the goods sector. While this unchanged reading was weaker than the consensus of a 13,500 rise, Canada’s labour market performed better than expected in 2023. Total job gains reached just over 430,000, which translated into a 2.2 per cent annual gain in total employment. Although the unemployment rate did increase 80 basis points over the course of 2023 to 5.8 per cent, this rise was mainly a result of an increasing labour force amid historic immigration, rather than significant job loss. However, with job gains slowing over the second half of last year, labour demand has weakened significantly. Combined with the expectation that the labour force will continue to grow, the unemployment rate is forecast to trend up and peak at roughly 6.5 per cent this year.
Accelerating wage growth a concern. The Central Bank’s next move is still expected to be an interest rate cut. However, with inflation holding stable at 3.1 per cent in November, combined with the unemployment rate being unchanged at 5.8 per cent in December and annual wage growth accelerating to 5.4 per cent — up from 4.8 per cent in November — the Central Bank may be more cautious of easing its overnight rate too soon. Money markets are still aggressive in pricing in a potential rate cut as early as March, despite the BoC stating that wage growth sticking above 4.0 per cent would hinder its efforts to sufficiently cool inflation. Consequently, the market-implied view may be slightly too optimistic, and borrowing costs could remain at the current level for longer than expected.
Commercial Real Estate Outlook
Retail property sector well-positioned. Canada’s retail sector showed healthy performance in 2023. The nation’s vacancy rate hovered just below 2.0 per cent by year-end, helping annual rent growth match that of inflation. This was mainly a result of limited supply, along with record population growth amid historic immigration. As of the end of the third quarter of last year, Canada’s population grew by a record-setting pace of 3.2 per cent annually. Retail performance was also aided by a healthy labour market, which helped cushion the impact of rising borrowing costs. Looking forward, a prolonged period of heightened interest rates could curb retail sales and property performance over the short-term. However, the long-term outlook remains positive. Population growth is expected to remain above long-term standards, and interest rates are anticipated to decline over the second half of the year. These factors will continue to expand Canada’s consumer base, while also providing some relief to households facing higher debt-servicing payments.
Office-using employment saw strong gains in December. Professional service employment saw a 46,000 position increase in December. This segment of the labour market is typically associated with office use; yet, the property type’s outlook still remains uncertain. Historic supply levels coming to market, along with the evolving trend of hybrid work causing firms to right-size office footprints, are likely to push vacancy rates up further over the coming year. Despite this, more clarity is beginning to form within the sector. The nation’s historic supply cycle is nearing completion, while demand for high-quality, Class A space continues to remain healthy.
* Employment through December, Retail Sales through October
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada;
Canada Mortgage and Housing Corporation; Capital Economics; CoStar Group, Inc.; Statistics Canada