Canadian Employment Slows, & BoC Mistakes Prompt Fears of Stagflation

Canada's job market is showing signs of weakness, raising concerns about the country's economic health. In March, the unemployment rate rose to 6.8%, the highest in nearly eight years, excluding the pandemic period. This increase occurred despite the addition of 50,500 jobs, as more people entered the workforce than there were jobs available.

The Bank of Canada (BoC) has been actively adjusting interest rates to manage inflation and support the economy. Over the past ten months, the BoC reduced its key interest rate by 2.25 percentage points, bringing it to 2.75%. However, with inflation rising to 2.6% in February, the central bank is now expected to pause further rate cuts to assess the situation.

Some economists believe that the BoC's previous rate hikes may have been too aggressive, potentially contributing to the current economic slowdown. The central bank had increased rates rapidly to combat inflation, but this may have inadvertently cooled economic growth and employment.

Adding to the complexity, Canada's productivity has been declining, making it harder to control inflation. The country has experienced weak productivity growth over the past three years, which can lead to higher costs and prices.

The combination of slow economic growth and rising inflation has led to fears of stagflation—a situation where the economy stagnates while prices continue to rise. This scenario is challenging to manage, as traditional tools to combat inflation may further slow growth.

As the BoC prepares for its next policy meeting, it faces difficult decisions. Balancing the need to control inflation without hindering economic growth will be crucial. The central bank's actions in the coming months will be closely watched, as they will significantly impact Canada's economic trajectory.