Canada’s unemployed will dominate economic narrative in 2025
GRAPHICS: STATISTICS CANADA THE DAILY
The latest job numbers released on Friday underscore how swiftly unemployment has taken centre stage as Canada’s No. 1 economic concern, even as affordability remains the dominant political issue in Ottawa. We have transitioned from a high-inflation economy to one grappling with rising unemployment.
I hesitate to use the word weak to describe the labour market. Canada continues to generate a respectable number of new jobs—though critics may quibble that too many are in the public sector.
In November, the economy added 51,000 jobs—a robust monthly increase. For the year, employment has risen by 322,000, already surpassing the two-decade annual average by 100,000 with a month still in hand. Over the past two years, Canada has created an impressive 810,000 net new jobs.
Yet, paradoxically, the ranks of the unemployed are swelling. (As shown in the charts above taken from Statistics Canada’s The Daily).
Last week’s Labour Force Survey report showed the number of jobless workers rose by 87,000 in November—the largest monthly increase since April 2021. Over the past year, unemployment has grown by 273,000, and by almost half a million compared with two years ago. Today, 1.5 million workers in Canada, or 6.8% of the labour force, are unemployed, the highest jobless rate since January 2017 outside the pandemic. The unemployment rate has jumped 1 percentage point over the past year.
All of this illustrates the extent to which 2024 has been a peculiar year for the economy, full of contradictions and crosscurrents. While economic growth has outpaced expectations, the labor market has underperformed. Canada finds itself in the unusual position of simultaneously creating significant employment and experiencing substantial unemployment.
The Bank of Canada has been aggressively cutting rates, signaling recession concerns, yet forecasters, including the central bank itself, predict a solid economic rebound. Investment remains scarce, while labour supply is plentiful. Political uncertainty—both internal and external—is casting long shadows over the economy, with the Canadian dollar falling precipitously.
This unsettled landscape is difficult to navigate—let alone build coherent policy around. No one can predict what will come next with any conviction.
Typically, rising unemployment of the scale we’ve seen demands an urgent and decisive policy response, ranging from broad stimulus measures to targeted job training and labour market reforms. However, the current situation is anything but typical.
When unemployment results from insufficient demand, fiscal and monetary interventions are clear remedies. When it stems from supply factors—such as a sudden influx of workers, as is the case now—the appropriate policy response is less obvious.
Policy updates this week
In the coming days, Canada’s central bank and its finance ministry will deliver key policy updates that will reveal their perspectives on these challenges.
On Wednesday, the Bank of Canada is expected to lower interest rates by another half percentage point, marking its fifth consecutive cut - reflecting Governor Tiff Macklem’s deepening worries over rising unemployment.
Later in the week, or the week after (we have no date yet), Finance Minister Chrystia Freeland will release a fiscal update that will provide some fresh guidance on where her policy thinking is headed for the new year. That policy statement will seem more unsure.
The federal government is caught in the confluence of a number of powerful currents that are pulling in different directions. Sagging poll numbers and the Liberal government’s precarious hold on power is driving them to populist policies like the recent decision to provide a two-month tax holiday on some consumption items.
The government, meanwhile, is trying to keep up appearances of prudence to sustain the nation’s fiscal and economic credibility with global investors. And deeper structural spending pressures - from defence to climate transition - are casting a shadow on the nation’s long-term finances.
There’s already a lot on the go and, for now, the federal government appears happy to defer to the Bank of Canada on the unemployment issue. (Freeland didn’t mention the rising jobless figures in a public appearance on Friday.)
Yet, the labour market is a minefield the government will need to navigate sooner or later. Even if lower interest rates revive growth, they may fail to make much of a dent on the unemployment rate in the short-term. Most economists are forecasting the jobless rate to remain at current elevated levels through most of next year.
Unemployment is not just an economic problem—it has profound social and political implications. Rising joblessness often exacerbates inequality and disproportionately impacts vulnerable groups. The current dynamics are particularly fraught: most new jobs have gone to newcomers, while native-born Canadians and older immigrants are falling into the unemployment ranks.
The labour market Venn diagram of newcomers gaining jobs and others losing them may be narrow, but the optics are potent. Public resentment can quickly escalate.
While the government remains fixated on affordability, unemployment is poised to dominate the economic narrative in 2025.
Delayed release
Finance Minister Chrystia Freeland said last week that the release of her budget update is imminent. The delay in producing updated fiscal accounts—both the final numbers for the last fiscal year (which ended March 31) and the latest estimates for the current year—has become a hot topic in Ottawa.
Freeland is blaming the ongoing two-month parliamentary filibuster for the wait. The fiscal update is usually delivered in November. Final fiscal year numbers have in the past typically been tabled in September or October. Technically, nothing is preventing Freeland from presenting her update outside of parliament, unless it includes new legislation. (Former Finance Minister Jim Flaherty released his 2012 budget update at an event in Fredericton, New Brunswick.)
Regardless, when the numbers are published, the fiscal picture will likely show revenue and expenditures coming in stronger than forecast in the near term, but with large risks to the fiscal trajectory in the medium term.
These risks to the fiscal framework are being driven by two things: heightened uncertainty around the Canadian economic outlook and growing spending pressures—for short-term political reasons and longer-term structural reasons.
Scotiabank released a note last week estimating that federal deficits will probably run about $40 billion larger than projected over the next six-year forecasting horizon—slowing the downward trajectory of both deficit and debt ratios as a share of GDP. This will make it harder for the government to keep its promise to bring the deficit below 1% of GDP by 2026. Freeland has also promised to keep the annual federal deficit below $40 billion as part of her fiscal “anchor” plan announced about a year ago.
