Canada's unemployment rate rose to 5.4% in June, economy adds 60,000 jobs

The Canadian labour market is showing some signs of softening as the unemployment rate rises and wage growth slows, but with another solid job gain last month, forecasters are still expecting a rate hike next week.

Statistics Canada reported Friday the economy added 60,000 jobs in June, far more than was estimated by economists and driven by gains in full-time work.

But as more people searched for work and the population continued to grow, the unemployment rate rose to 5.4 per cent — the highest it's been in over a year.

That's up from 5.2 per cent in May, marking the second month in a row the unemployment rate has risen as economists watch for softening in the labour market amid high interest rates.

"The rapidly growing labour force, which was also helped along by a rise in participation, will further ease some of the labour shortages reported by employers," wrote Desjardins economist Royce Mendes in a note.

Population growth will also mean additional demand for goods and services "in an economy that's already running too hot," he said. "But on the whole, this was a very strong labour market update."

Job gains were concentrated in wholesale and retail trade, manufacturing, health care and social assistance, and transportation and warehousing.

"I think what's happening is, despite [this] tighter monetary policy, we're trying to hammer down consumer spending, we're seeing essentially this excess demand problem being in part satisfied by our ability now to find workers and get them employed," said Pedro Antunes, chief economist at the Conference Board of Canada.

The supply of workers coming into Canada has outpaced job growth, which is why the unemployment rate has risen, said Antunes.

"I see a beneficial situation in the sense of, we are addressing ... the excess demand issue by adding to supply with more workers, and we're taking some pressure off of the labour market with the unemployment rate coming up a little bit."

Likely good news for central bank

The loosening of the labour market likely comes as good news to the Bank of Canada, which is looking for signs that its aggressive rate hikes are working to cool the economy.

But forecasters are still expecting the central bank to raise interest rates at its next interest rate decision on Wednesday. The current pace of hiring likely exceeded the central bank's expectations when it paused its rate hikes earlier this year, according to Mendes.

"The return to solid job growth in June should, therefore, lock in a second consecutive 25bp rate increase next week as central bankers scramble to tamp down the surprisingly resilient economy and resultant excess inflationary pressures," he wrote.

The central bank opted to end its pause on rate hikes in June after a string of economic data suggested interest rates weren't high enough.

The quarter percentage point rate hike brought its key interest rate to 4.75 per cent, the highest it has been since 2001.

The central bank has said repeatedly that Canada's hot labour market is contributing to high inflation, raising concerns about the pace of wage growth in particular.

However, Statistics Canada said year-over-year wage growth slowed significantly last month, rising 4.2 per cent from a year ago. That compared with a year-over-year gain of 5.1 per cent in May.

The central bank hasn't given any clear indication of its plans, saying it will make its decision based on the economic data.