Monday, November 24, 2008

Canada's labor market is set to decline; expansionary policy will help

Canada has been holding its own. With its stronghold in commodity-based production, profits have soared, growth in commodity production has outweighed (mostly) weak manufacturing , the housing market remained rather resilient , the banking system is ranked number one in the world and the strong Canadian dollar has held core inflation in check.

But with U.S. economic growth expected to post at least a 2.9% annualized decline (I suspect more like 4%) in the fourth quarter of 2008, Canadian exports, which have already declined two consecutive months, will continue their decent into 2009. Alongisde a deteriorating labor market, this is likely to drag down Canada's growth rate into negative territory.

Compared to the U.S., where employment has declined by 1.2 million jobs since the beginning of the year, the job market is strong in Canada, where employment has grown by 203,000 jobs throughout 2008. But the October payroll and anecdotal evidence suggest that the labor market will turn downward into 2009.

October payroll added 10,000 jobs, but only because the election added more public-sector jobs than did the private sector sutract. And consistent with the private payroll, the unemployment rate rose 0.1% to 6.2%.

Headlines suggest that the October payroll is only the beginning, and the unemployment rate is set to rise. From the Globe and Mail:

More than one-fifth of Canadian employers plan to reduce their headcount in the coming year as the financial crisis forces companies to cut costs, a compensation planning survey showed Monday.

Mercer's updated survey showed 22.6 per cent of employers plan to cut jobs and more than half are considering the move.

Employers are also taking other steps to cut costs. One-third said they plan to make changes to their health and benefits program. And half will lower their salary increases next year to about 3 per cent from the average increase of 3.8 per cent they'd planned in the second quarter – a similar finding as that of a Conference Board of Canada report last month.
Mercer recommended employers boost communication with staff through the economic turbulence.

“The majority of employees appreciate transparent and honest communication during tough economic times,” the consulting firm said. “Understanding the issues and the tough decisions to be made may not make things any easier, but it may cultivate a sense of ‘we're all in this together' and actually improve employee engagement.”

Not all sectors are ratcheting down salary increases. In the public sector, only 16 per cent of employers plan to lower pay hikes, the poll said.

The survey results are based on responses from 175 participants.
It's just impossible for Canada to get through this one without the U.S. export market. I expect that the Bank of Canada (BoC) will lower rates at least 50 bps at its December meeting. Furthermore, the BoC has initiated alternative liquidity measures - Term PRA Facility for Private Sector Money Market Instruments and Term Loan Facility - that will help the credit markets going forward.

Canada is expected to get a fiscal stimulus via broad-based tax breaks (note that Finance Minister Jim Flaherty says in the Bloomberg article that the U.S. is not in a recession until 2009 - he is crazy!). The only worry here is that the stimulus measures are just not enough.

Canada is starting from a higher point than the U.S. and its expansionary policy will help going forward. But there is nothing that Canada can do if the U.S. posts a 4% decline in the fourth quarter of 2008. It's like the blind leading the blind.

Rebecca Wilder

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