Canada loses 200,000 jobs, nearly double the blow economists expected

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Canadians worked significantly fewer hours in January, and the jobless rate surged, evidence that the Omicron wave of COVID-19 has slowed economic growth.

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Statistics Canada’s January Labour Force Survey found that hours worked dropped 2.2 per cent from December, when hours had returned to pre-pandemic levels. A decline in economic activity of that size will interrupt the momentum that the economy had built over the later half of 2021. The Bank of Canada estimated last week that gross domestic product (GDP) grew at an annual rate of almost six per cent in the fourth quarter, but acknowledged that the fifth wave of coronavirus infections probably will cause growth to slow to two per cent this quarter.

The unemployment rate jumped to 6.5 per cent from six per cent, and employment dropped by 200,000 positions, more than most Bay Street forecasters were expecting. The numbers confirm anecdotal evidence of what happened as provincial governments re-introduced restrictions at restaurants, arenas, other high-touch businesses to limit the spread of the highly contagious Omicron variant. Those restrictions are now beginning to loosen. For example, Quebec, which instituted a curfew around Christmas, has dropped that measure, and François Legault’s government allowed restaurants to re-open at half capacity this week. Similar things are happening across the country, including Ontario, where lockdown measures rivaled those of Quebec.

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Employment dropped by about 146,000 positions in Ontario, and declined by about 63,000 positions in Quebec. Increased hiring in all of the Western provinces was too modest to offset the effect of strict health measures in the country’s two most populous jurisdictions. The United States reported surprisingly strong employment numbers for January, further evidence that the headwinds that slowed Canada’s momentum at the start of the year will dissipate as soon as authorities decide they have done all they can to take pressure off their health systems. The U.S. generally opted against confronting the latest COVID wave with strict health restrictions, tolerating a jump in infections and deaths so the economy could continue to function normally.

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Some economists wondered ahead of the report if the employers most affected by the lockdowns would keep workers on the payroll, rather than risk losing them during a period of extreme competition for workers. That doesn’t seem to have happened. The drop in employment was nearly double the Bay Street consensus. Statistics Canada said the number of people who reported working less than their usual number of hours increased by 66 per cent, the biggest jump since March. That will take some of the heat out of demand; tens of thousands of people suddenly have less purchasing power than they did at the end of 2021.

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“While the drop in employment was larger than we had expected in January, job losses were well-expected, and should prove to be very temporary,” Veronica Clark, an economist at Citigroup Global Markets Inc., said in a note to her clients, observing that most of the job losses were tied to the hospitality industry. “We expect to see at least some jobs regained in the next report for February and employment continue to rise through the spring.

Canada’s economy had reached a state that some economists call “full employment,” a theoretical condition where essentially everyone who wants to work could find a job, and therefore additional hiring would put upward pressure on wages and inflation.

One month of data probably won’t change that assessment, especially since COVID restrictions are already beginning to loosen. The Bank of Canada’s primary concern is now inflation, which is running at its fastest rate in more than three decades.

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The jobless rate was hovering around 5.5 per cent in 2019, and yet inflation was benign, suggesting that it might be possible to run the economy hotter than the Bank of Canada had thought in the past. In fact, Tiff Macklem, the governor, initially thought he might leave borrowing costs unusually low until the unemployment rate returned to that level. However, as inflation took off over the course of last year, policy-makers decided it would be too risky to test the limits of their understanding of full employment. Macklem and his deputies made clear last week that they quite likely will decide to lift interest rates next month.

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Statistics Canada offered some positive news on the inflation front. It said average hourly wages grew 2.4 per cent from January 2021, compared with year-over-year gains of 2.7 per cent in the previous two months. That could suggest that inflation hasn’t yet infected wage demands, an important indicator of whether the current burst of price increases will fade or become persistent.

“The job losses and rise in the unemployment rate were expected by Bank of Canada and do not change its view of the economy,” Charles St-Arnaud, a former Bank of Canada economist who now is chief economist at Alberta Central. Both St-Arnaud and Clark said they still expect Macklem and his deputies will raise the benchmark interest rate at the end of their next round of policy deliberations on March 2.

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