written by Strac Ivanov, MBA, President of Vicinity Jobs Inc
The media buzz created by Statistics Canada’s latest Labour Market was hardly comforting. The economy lost 46,000 jobs in December and unemployment crept up 0.3 percentage points to 7.2% — making December one of 2013’s highest unemployment months (on par with March and April). In fact, it now seems that unemployment has hardly budged ever since reaching its current levels back in November 2012. Economists agree that Canada`s economy is not firing on all cylinders, so there should be room for the economy to grow faster, which should in turn result in employers hiring more and laying off less. The fact that this isn’t happening is a cause for concern.
I pointed out in September that Canada’s job market seemed “stuck in neutral”. We saw hiring demand spike in the summer month in most regions that we monitor, only to see it go back to its earlier levels. Is this the new normal? Or even worse: Is this the start of a new worsening trend?
Actually, I believe that events and news from the past couple of months have created a better environment to support employment growth in Canada. There are 3 major trends that make me more optimistic than I was a few months ago:
- The Canadian Loonie has lost almost 10% of its value against the US dollar over the past few months (and is unlikely to go back any time soon). Although this is bad news for people with savings in Canadian dollars and for Canadian cross-border shoppers, it provides a very welcome relief to Canadian exporters who pay their Canadian employees salaries in Canadian dollars. Since export deals are usually priced in US Dollars, such companies can now offer their products at a nominal price 10% lower than before without sacrificing their margins, or achieve higher margins which they could then re-invest (hopefully in Canada). This should help them drum up more business – and hopefully encourage them to hire more employees at home.
- The US economy now seems to stand on a more solid footing than it did a few months ago. Admittedly, December’s US labour market report (also released on Friday) was just as bad as Canada’s. But it comes after several months of solid employment growth in the US and seems to have been impacted to some extent by December`s unseasonably cold weather (which, for example, would have caused construction companies to defer the start of building projects). Other economic indicators point to improvements that are tangible enough to have finally convinced the US Federal Reserve to start winding down its money printing stimulus experiment dubbed “Quantitative Easing”. And US politicians are finally showing signs of moving beyond their partisan divides, which will hopefully convince businesses and investors that they will be more supportive of economic growth priorities.
- The Canadian Stock market is finally growing. This should make it easier for Canadian publicly traded companies to get access to capital, which they will hopefully invest at home, creating Canadian jobs. Until 2011, the Canadian stock market was moving more or less in tandem with the US. However, its performance had been lackluster lately: Whereas the US S&P 500 stock index gained over 35% from September 2011 until June 2013, Canada`s TSX index dropped 5%. However, since July 2013, Canada`s stock market has been again performing on par with the US market and posted an impressing 13% gain in only 6 months. This improvement is likely to continue with the decline of the Canadian dollar.
On the flipside, however, there are risks:
- In a global economy, there is no guarantee that capital raised in Canada or money saved in Canada will be invested or spent here. Companies invest their capital where it is generating the best returns. The past few years, for example, many companies in the US and Canada have been delivering strong financial results, but investment spending levels have remained disappointingly low. At the same time, asset bubbles have been blown up in developing markets (most notably China), suggesting unhealthy abundance of capital and credit there. Hopefully a cheaper Canadian Dollar will help tip the balance in favour of investing in Canada.
- A cheaper Canadian dollar means that imported goods will become more expensive in Canada. It will also increase the price of commodities (such as gas), which are generally traded in US dollars. Although this will make Canadian products more competitive at home too, it will also increase inflationary pressures. If prices start rising, this will erode some of the advantages that Canadian business would enjoy thanks to the cheaper loonie. Higher inflation may also prompt Canada’s central bank to raise interest rates earlier than it currently anticipates. This could be a frightening prospect, with Canadian household debt having reached record levels just last month.
- If the high-flying Canadian real estate prices drop, this may put a significant pressure on economic growth. This would hurt: In the past years, our economy has become a lot more reliant on the real estate sector than it was before. Most economists seem to believe that the prospect of a real estate crash is fairly small at the moment, but this could change once interest rates start rising.
- Canada’s government remains committed to cutting spending to balance its budget within the 1-2 years timeframe it has committed to. It may be too early for such reductions. With an underperforming economy, this strategy may backfire and put more downward pressure on economic growth. Hopefully the private sector will deliver some solid growth to offset and cuts in public spending.
Overall, however, notwithstanding the disappointing job market performance of the past year, the prospects for Canada’s economy – and by extension the job market – look better now than they did a few months ago. It remains to be seen whether the risks materialize – and to what extent.