Canada's economy posts jobs gain and unemployment drop, but trade uncertainty 'casts cloud' for BoC

Yahoo

07-02-2025

Canada's labour market added a net 76,000 jobs in January, surpassing analyst expectations, while the unemployment rate fell 0.1 percentage points to 6.6 per cent, according to Statistics Canada data released on Friday.
The drop in the unemployment rate was unexpected, marking the second consecutive monthly decline, and the jobs gain was more than triple what economists had forecast. Economists had expected a jobs gain of 25,000 and for the unemployment rate to climb back up to 6.8 per cent, according to Reuters.
"If we weren't all absorbed with the possibility of a trade war, we would be talking about the comeback in the Canadian domestic economy in recent months," BMO chief economist Douglas Porter wrote in a research note on Friday.
"The turnaround in jobs growth, even amid cooler population trends, reinforces the message from firmer auto and home sales that the economy was turning a corner, thanks to the heavy-duty drop in interest rates in the past eight months. Alas, we still need to contend with the lingering uncertainty on the trade front, which casts a cloud over these sunny jobs figures."
The Bank of Canada cut its benchmark rate by 25 basis points last month as Governor Tiff Macklem warned that a trade war between Canada and the United States "would badly hurt economic activity in Canada."
Porter says while the report does not reinforce a need for near-term rate relief from the Bank of Canada, "the clear and present trade risks will keep rate-cut hopes alive." Still, market bets reduced the odds of a 25 basis point rate cut at the Bank's next decision in March, to 58 per cent from 72 per cent before the jobs report was released, according to Reuters.
RBC assistant chief economist Nathan Janzen wrote in a research note that it's "probably too early to give labour markets the all clear", particularly given the unemployment rate is still up almost a percentage point from last year, "but the unemployment rate may be closer to peaking (or have peaked) earlier than feared." He notes that the Bank signalled further reductions would be contingent on economic data looking soft, so another solid jobs report would reduce urgency to cut rates again next month.
"Still, interest rates are at relatively high levels relative to a soft economic backdrop, household spending has shown signs of picking up, but business spending is still very soft," Janzen wrote.
"There remain significant risks that U.S. tariffs could be announced before the March policy meeting, and another round of labour market and inflation data still to be released before then."
January's rise in employment follows a strong December gain, and is the third monthly increase as jobs growth is no longer being outpaced by population growth.
The increase was driven by employment gains in the private sector, where 57,200 jobs were added, while the public sector posted a slight decline (-8,400), although Statistics Canada notes that public sector employment is still up by 107,000 on an annual basis. Self-employed workers rose by 22,900. Manufacturing led the way across sectors, posting a jobs gain of 33,000 in January.
CIBC economist Andrew Grantham wrote in a research note on Friday that the January jobs report "is clearly a very positive report once again." However, he notes that the recent drop in the unemployment rate brings it to where it stood in October "and is still consistent with a labour market with plenty of slack."
"We continue to think that even lower interest rates will be needed for the economy to fully absorb that slack, particularly given heightened trade uncertainty which could impact hiring decisions ahead."
The January jobs data follow a strong December report. In December, Canada's labour market added a net 90,900 jobs, blowing past analyst expectations, while the unemployment rate ticked down to 6.7 per cent. The jobs gain marked the biggest monthly increase in nearly two years, and was almost quadruple what economists were expecting.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on X @alicjawithaj.
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