Canada’s Strong Economy Creates Massive Job Gains, But a Recession Is Still Possible

COVID-19 wreaked havoc on the Canadian and global economies. In February 2020, prior to the COVID-19 economic shutdown, the unemployment rate was 5.6%. Just three months later, the jobless rate hit a record high 13.7%.

Since then, as the economy has reopened, Canada’s unemployment rate has steadily fallen. In fact, Canada’s jobless rate plunged to 5.5% in February, the lowest reading since the start of the pandemic and one of the lowest readings since the mid-1970s. Despite the strong job creation and economic growth, there are still concerns Canada could face a recession.

How Is the Canadian Economy Doing?

Thanks to a red-hot economy, Canadian employers created 337,000 jobs in February with the jobless rate falling to 5.5%. This trounces previous forecasts calling for 160,000 jobs and a jobless rate of 6.2%.

After the report was releases, the Canadian dollar rose and bond yields jumped, as investors rebalanced their expectations to align with a strong Canadian economy. Before the report, the Canadian dollar was worth USD$0.78. It is currently hovering at around USD$0.80.

The strong job creation forced Bay Street to revaluate their outlook for the Canadian economy. Scotiabank upped its first quarter gross domestic product (GDP) guidance to an annual rate of 4.1%. In January, the Bank of Canada anticipated first quarter GDP growth of approximately 2.0%.

Despite the strong job creation, inflation continues to be a burden with the consumer price index surging to 5.1% in January, significantly higher than the Bank of Canada’s target of two percent. This paves the path for steeper interest rate hikes over the coming quarters.

What Could Derail the Canadian Economy?

Despite the red-hot economy and job creation there are growing concerns Canada could face a recession. How? The war in Ukraine is a bit of a wildcard. Even though Canadian companies and investors have little exposure to Russia, the war is undermining global growth. And Canada relies heavily on trade. Slower growth in the rest of the world means slower economic growth in Canada.

The U.S. is Canada’s largest trading partner with our exports to the U.S. historically accounting for around 75% of annual trade. With inflation south of the border at a four-decade high, rising interest rates, and weaker than expected growth expectations, a recession in the U.S. is all but inevitable.

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The strong Canadian economy created an unprecedented number of jobs in February, which points to even bigger interest rates going forward. Unfortunately, higher interest rates weigh heavily on stocks and bonds, which could stagnate or fall as rates climb. A recession in the U.S. could also negatively impact Canadian and global equities.

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