Canada Employment

Labour Market Continues to Loosen;
Wage Growth Remains a Risk for Central Bank

Jobs report shows mixed results. Canada’s economy added 27,000 jobs in May. While this headline reading was strong, underlying details pointed to further loosening in the employment market. The unemployment rate increased 10 basis points to 6.2 per cent as job gains were not able to keep pace with surging population growth. This put the jobless rate 140 basis points above the post-pandemic low and up nearly 100 basis points compared to a year ago. In addition, monthly gains in hours worked eased, and job growth was primarily driven by a 62,000-position increase in part-time labour. In contrast, full-time employment fell by 35,000. Nevertheless, despite further signs indicating an easing labour market, annual wage growth accelerated to 5.1 per year over year in May, up from the 4.7 per cent reading observed in April. As a result, the Bank of Canada may take a more gradual approach in lowering its overnight rate. 

Markets see additional rate cut in July. Following May’s employment results, Canada saw its loonie fall sharply against the greenback, while money markets trimmed back their bets for a July rate cut. Nevertheless, despite still elevated wage growth, swap markets continued to favour an additional rate cut in July and a total of three cuts for the year. In addition, economists at Canada’s big six banks are forecasting the monetary authority to lower its key policy rate to 4.0 per cent by December. While the magnitude and pace at which Canada’s Central Bank lowers its overnight rate remains up for debate, it is clear that further cuts are coming by year-end. This will support overall economic growth and demand for commercial real estate space, creating optimism among potential buyers. 

Commercial Real Estate Outlook

Housing sector a drag on labour market. Construction employment fell by almost 30,000 positions in May. Weaker home sales and the 7.0 per cent drop in housing starts seen in 2023 could be the main contributers to these job losses as they are finally weighing on labour demand. This comes at a time when Canadians are in dire need of further housing supply as affordability levels are at all-time lows. Not only are elevated home prices and interest rates limiting the potential buyer pool, but the nation’s apartment vacancy rate hit an all-time low of 1.5 per cent in 2023, supporting record-high annual rent growth of 8.4 per cent. Nevertheless, development activity could gain momentum over the course of 2025.  Construction financing is priced around shorter-term money — such as the one- and three-year bond yields — which are more influenced by the overnight rate. With the Bank of Canada set to lower its key policy rate further this year, construction activity and employment gains are likely to materialize as more projects pencil out.

Office-related employment sees strongest gains. Both the finance, insurance and real estate sector as well as the healthcare and social assistance sector saw job gains of just under 30,000 positions, the most among all industries. This strong showing in office-related employment is a positive for a sector that continues to see vacancy rates sit at elevated levels of nearly 14 per cent as of the first quarter. The combination of future economic growth supporting office-related job gains amid falling interest rates coupled with the nation’s historic construction cycle nearing completion could help stabilize office vacancy rates over the course of next year.           

* Through May; ** Through April; *** Trailing-12-month average
Sources: Marcus & Millichap Research Services; Altus Data Solutions; Canada Mortgage and Housing Corporation;
Capital Economics; CoStar Group, Inc.; Statistics Canada