Labour Market Weakness Continued in May, Raising the Prospects of a Rate Cut at The Next BoC Meeting

Today’s Labour Force Survey for March was weaker than expected. Employment decreased by 33,000 (-0.2%) in March, the first decrease since January 2022. The decline in March followed little change in February and three consecutive months of growth in November, December and January, totalling 211,000 (+1.0%).

Today’s Labour Force Survey for May showed a marked adverse impact of tariffs on the Canadian economy. Employment held steady for the second consecutive month at a modest net job change of 8,800–below expectations.

Growth in full-time employment (+58,000; +0.3%) was offset by a decline in part-time work (-49,000; -1.3%). There has been virtually no employment growth since January, following substantial gains from October 2024 to January 2025 (+211,000; +1.0%).

The employment rate—the proportion of the population aged 15 and older—was unchanged at 60.8% in May, matching a recent low observed in October 2024. The employment rate had fallen for two consecutive months in March (-0.2 percentage points) and April 2025 (-0.1 percentage points).

The number of private sector employees rose by 61,000 (+0.4%) in May, the first increase since January. Public sector employment fell by 21,000 (-0.5%) in the month, following an increase in April that was partly attributable to the hiring of temporary workers for the federal election. Self-employment also fell (-30,000; -1.1%) in May, the first significant decrease since May 2023.

The unemployment rate increased 0.1 percentage points to 7.0% in May, the highest rate since September 2016 (excluding 2020 and 2021, during the pandemic). The uptick in May was the third consecutive monthly increase; since February, the unemployment rate has risen by 0.4 percentage points.

There were 1.6 million unemployed people in May, an increase of 13.8% (+191,000) from 12 months earlier. A smaller share of people who were unemployed in April transitioned into employment in May (22.6%), compared with one year earlier (24.0%) and compared with the pre-pandemic average for the same months in 2017, 2018 and 2019 (31.5%) (not seasonally adjusted). This indicates that people face greater difficulties finding work in the current labour market.

The average duration of unemployment has also been rising; unemployed people had spent an average of 21.8 weeks searching for work in May, up from 18.4 weeks in May 2024. Furthermore, nearly half (46.5%) of people unemployed in May 2025 had not worked in the previous 12 months or had never worked, up from 40.7% in May 2024 (not seasonally adjusted).

The layoff rate—representing the proportion of people who were employed in April but became unemployed in May as a result of a layoff—was 0.6%, unchanged from May 2024 (not seasonally adjusted).

Total hours worked were unchanged in May but were up 0.9% compared with 12 months earlier.

Average hourly wages among employees increased 3.4% (+$1.20 to $36.14) year-over-year in May, the same growth rate as in April (not seasonally adjusted).

Employment rose in wholesale and retail trade (+43,000; +1.5%) in May, driven by gains in wholesale trade. The increase partially offsets monthly declines in March and April 2025, totalling 55,000 (-1.8%).

In May, employment increased in information, culture and recreation (+19,000; +2.3%) and finance, insurance, real estate, rental and leasing (+12,000; +0.8%). Employment has increased in finance, insurance, real estate, rental and leasing since October 2024, with a net increase of 79,000 (+5.6%) over the period.

Meanwhile, public administration employment fell (-32,000; -2.5%), offsetting the increase in April that was related to temporary hiring for the federal election. Prior to these offsetting changes, there had been little change in public administration employment since July 2024.

Chart 5 Employment change by industry, May 2025

Employment also declined in May in transportation and warehousing (-16,000; -1.4%); accommodation and food services (-16,000; -1.4%), and business, building and other support services (-15,000; -2.1%).

Bottom Line

US nonfarm payroll data were released this morning, showing a still resilient economy with tariffs beginning to leave their mark. The US added 139,000 jobs in May, exceeding estimates, while the jobless rate remained at 4.2%. A decline in the labour force participation rate kept the lid on May’s US unemployment rate. But the number of unemployed rose for a fourth month, the longest such streak since 2009. Payrolls for the prior two months were revised downward, and wage gains outstripped inflation, helping to boost consumer spending.

A number of other labour market indicators show signs of increasing stress. Household employment dropped by a whopping 696k in May as the labour force shrank by 625k. This kept the unemployment rate relatively stable at 4.244%, but it is hardly a sign of labour market strength and resilience.

Manufacturing employment dropped by 8k, the sector’s worst performance since January. Construction employment growth also slowed to 4k from 7k in April, which is unusual during the Spring home-selling season. There were also stinging net job losses coming from temporary help firms, retail trade, and the Federal government. These sectors likely feel the combined strain from tariffs and DOGE-driven Federal spending cuts.

Nothing in the May employment report will push the Fed off the sidelines earlier than the markets expect. The steady unemployment rate and improvement in the three-month average of monthly job gains will keep the Fed firmly in the wait-and-see camp. With that said, cracks in the façade of labour market resilience are now starting to show, and the longer the tariff uncertainty and government spending cuts continue, the worse the labour market reports are bound to be. Signs of net job loss in manufacturing, temporary help, retail trade, and government are tell-tale signs of that damage.

On the Canadian side, tariffs have already had a substantial effect on the labour market. The jobless rate is at its highest since 2016, excluding the pandemic, as industries impacted by tariffs are laying off workers. The doubling of the tariff on steel and aluminum is especially deleterious. Trade-related sectors are struggling, while domestic-facing industries are partially offsetting the damage.

The May jobs report could have been worse, given that it was burdened by the loss of more than 30,000 election workers. Any increase is welcome, and the gains in private-sector and full-time jobs are encouraging. The glaring issue is that the manufacturing sector is under intense strain amid the deep trade uncertainty, and the overall job market continues to soften, highlighted by the grinding rise in the unemployment rate. In over two years, the jobless rate has risen by two percentage points, as we have gone from 2022 to 2023, when it was difficult to find workers, to today, when it is difficult to find work. While May’s mixed report doesn’t give a clear-cut signal to the BoC, the bigger trend of a rising jobless rate will keep them in easing mode through the year’s second half.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Holds Rates Steady for the Second Consecutive Meeting–But Two More Rate Cuts Are Likely This Year

As expected, the Bank of Canada held its benchmark interest rate unchanged at 2.75% at today’s meeting, the second consecutive rate hold since the Bank cut overnight rates seven times in the past year. The governing council noted that the unpredictability of the magnitude and duration of tariffs posed downside risks to growth and lifted inflation expectations, warranting caution regarding the continuation of monetary easing.

The gap between the 2.75% overnight policy rate in Canada and the 4.25-4.50% policy rate in the US is historically wide. Another cause of uncertainty is the fiscal response to today’s economic challenges. If the Big Beautiful Bill, now under consideration in the Senate, survives, the US is slated to run unprecedented budget deficits. The Congressional Budget Office estimates it would add roughly US$4 trillion to the already burgeoning federal government’s red ink. This has caused a year-to-date rise in longer-term bond yields, steepening the yield curve.

Uncertainty remains high, and the US President just doubled the tariff on steel and aluminum to 50%, which could halt Canadian metals exports to the US. Last week’s release of the first quarter GDP report at 2.2% annualized growth was stronger than expected as exports and inventories surged before the tariffs. Final domestic demand in Canada was flat.  More recent data showed considerable weakness, especially in labour and housing markets. Consumer spending has also slowed sharply.

In today’s press conference opening comments, Governor Macklem said, “The extreme financial turmoil we saw in April has moderated, and stock markets have recovered their losses. However, the outcomes of the trade negotiations are highly uncertain. Tariffs are well above their levels at the beginning of 2025, and new trade actions are still being threatened. The recent further increases in US tariffs on steel and aluminum underline the unpredictability of US trade policy.”

“So far, the US economy has proven resilient. Imports were strong as businesses tried to get ahead of tariffs, and that pulled down first-quarter US GDP. But domestic demand remained relatively strong. Early indicators for the second quarter suggest a rebound in growth as imports fall back and domestic demand continues to expand.

The flip side of the strength in US imports was a surge in Canadian exports. This boosted first-quarter GDP growth in Canada, which came in at 2.2%, slightly stronger than the Bank had forecast.

The labour market has weakened, with job losses concentrated in trade-intensive sectors. The unemployment rate rose to 6.9% in April. So far, employment has held up across sectors less exposed to trade. However, businesses generally tell the central bank they plan to scale back hiring.

The pull forward in exports and inventory accumulation in the first quarter borrows economic strength from the future, so the second quarter is expected to be much weaker. Canadian families and businesses’ spending has shown some resilience in the face of US tariffs and heightened uncertainty. But they will likely remain cautious, suggesting domestic spending will remain subdued.

Inflation excluding taxes was 2.3% in April, slightly more substantial than the Bank had expected and up from 2.1% in March. The Bank’s preferred measures of core inflation and other measures of underlying inflation moved up in April. There is some unusual volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought. Higher core inflation can be partly attributed to higher goods prices, including food, and may reflect the effects of trade disruption. Many businesses report higher costs for finding alternative suppliers and developing new markets. The Bank will be closely watching measures of underlying inflation to gauge how inflationary pressures are evolving.

The Bank is also monitoring inflation expectations closely. In April, we reported that consumers and businesses expected prices to rise due to tariffs, while longer-term inflation expectations remained well anchored. Recent surveys continue to show consumers bracing for higher prices, and many businesses say they intend to pass on tariff costs.

Governing Council will continue to assess the timing and strength of the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs.

At this decision, there was a consensus to hold the policy unchanged as we gain more information. The BoC also discussed the path ahead for the policy interest rate. Here, there was more diversity of views. On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained.

Bottom Line 

We expect the Canadian economy to post a small negative reading (-0.5%) in both Q2 and Q3, bringing growth for the year to 1.2%, just one tick above the recently released OECD forecast for Canada. The next Governing Council decision date is July 30, which will give the  Bank time to assess the underlying momentum in inflation and the dampening effect of tariffs on economic activity.

If inflation slows over the next couple of months—we get two CPI releases and two jobs reports before the next meeting—and the economy slows in Q2 and Q3 as widely expected, the Bank will likely cut rates two more times this year, bringing the overnight rate down to 2.25%.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Q1 GDP Growth Was Bolstered by Tariff Reaction As Residential Construction and Resale Activity Weakened Further

Statistics Canada released Q1 GDP data showing a stronger-than-expected 2.2% seasonally adjusted annual rate, a tick above the pace of the quarter before. Exports drove growth as companies in the United States rushed to stockpile Canadian products before U.S. President Donald Trump imposed tariffs.

Growth was headlined by strong exports and inventory accumulation, as firms attempted to front-run deliveries ahead of the United States’ tariffs. Domestic demand remained muted. The expansion exceeded even the most optimistic economist’s projection in a Bloomberg survey and was above the Bank of Canada’s forecast for a 1.8% increase.

Total exports rose 1.6% in the first quarter of 2025 after increasing 1.7% in the fourth quarter of 2024. In the context of looming tariffs from the United States, exports of passenger vehicles (+16.7%) and industrial machinery, equipment and parts (+12.0%) drove the overall export increase in the first quarter of 2025. Meanwhile, there were lower exports of crude oil and crude bitumen (-2.5%) and refined petroleum energy products (-11.1%).

Imports increased 1.1% in the first quarter, following a 0.6% rise in the previous quarter. Higher imports of industrial machinery equipment and parts (+7.4%) and passenger vehicles (+8.3%) led the overall increase. The threat of tariffs can be expected to influence trading patterns and incite importers to increase shipments before these tariffs are implemented to avoid additional costs. At the same time, travel imports fell 7.0% in the first quarter, as fewer Canadians travelled to the United States.

Preliminary data also suggests some continued momentum at the start of the second quarter, with output rising 0.1% in April, led by the mining, oil and gas, and finance industries. March’s growth of 0.1%—which matched expectations—was also driven by resource extraction sectors. Oil and gas extraction, construction, retail, transportation, and warehousing led the growth.

One of the sectors hardest hit by trade uncertainty appeared to be manufacturing. The sector contracted in March for the first time in three months, and advance data also showed that manufacturing led the decreases in April.

Early tracking for the second quarter, assuming flat readings for May and June, points towards modest growth.

Traders in overnight swaps pared expectations for a 25 basis point cut at the Bank of Canada’s interest rate decision next Wednesday, putting the odds at about 15%.

Some of the gains in growth will likely be temporary, masking the slowdown in household consumption and business investment, which will likely worsen in the coming months. The household saving rate slowed to its lowest level since the first quarter of last year as increases in disposable income were lower than nominal household consumption expenditures. Residential investment fell, and business investment in non-residential structures declined. Final domestic demand — representing total final consumption expenditures and investments in fixed capital — didn’t increase for the first time since the end of 2023.

Residential investment decreased 2.8% in the first quarter. This was driven by an 18.6% decline in ownership transfer costs, representing resale market activity. This was the most significant decline in ownership transfer costs since the first quarter of 2022 (-34.8%), when a string of interest rate increases curbed housing resales. Despite a decline in resale activity, new construction rose 1.7% in the first quarter of 2025, led by increased work put in place for apartments, primarily in Ontario. Renovations (+0.5%) also edged up in the first quarter.

The first-quarter expansion is also likely to be the country’s most robust quarterly growth this year. The Bank of Canada and economists expect the economy to either grind to a halt or contract starting in the second quarter. Expected fiscal stimulus from Prime Minister Mark Carney’s government and the central bank’s resumption of rates are likely to help offset some of the damage posed by Trump’s tariffs.

Bottom Line

This is the last critical data report before the Bank of Canada meets again on Wednesday. Their decision will be a close call, but they will likely remain on the sidelines, keeping their powder dry before recessionary pressures force them to cut the overnight policy rate by at least another quarter point.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Today’s Inflation Report Poses a Conundrum for the Bank of Canada

The headline inflation report for April showed a marked slowdown in the Consumer Price Index (CPI), which rose a mere 1.7% year over year (y/y), down sharply from the 2.3% rise in March. The slowdown in April was driven by lower energy prices, which fell 12.7% following a 0.3% decline in March. Excluding energy, the CPI rose 2.9% in April, following a 2.5% increase in March.

Higher prices for travel tours (+6.7%) and food purchased from stores (+3.8%) moderated the slowdown in the CPI in April.

The CPI fell 0.1% in April, and it was down 0.2% on a seasonally adjusted monthly basis.

Gasoline led the decline in consumer energy prices, falling 18.1% y/y in April, following a 1.6% decline in March. The removal of the consumer carbon price tax mainly drove the price deceleration in April. Lower crude oil prices also contributed to the decline. Global oil demand decreased due to slowing international trade related to tariffs. In addition, supply from the Organization of the Petroleum Exporting Countries and its partners (OPEC+) increased.

Year over year, natural gas prices fell 14.1% in April after a 6.4% gain in March. The removal of the consumer carbon price contributed to the decline.

The dramatic decline in energy prices reflects the global economic slowdown caused by President Trump’s tariff mayhem.

The core inflation measures exceeded expectations last month, with the trimmed rate increasing to 3.1% y/y and the median rate rising to 3.2% y/y—above the target inflation range. The three-month moving average of the core rates rose to 3.4%, from 2.9% previously.

Food Prices Rose Sharply
In April, prices for food purchased from stores increased faster, increasing 3.8% year over year compared with 3.2% in March. Prices for food purchased from stores have grown faster than the all-items CPI for three consecutive months.

The most significant contributors to the year-over-year acceleration in April were fresh vegetables (+3.7%), fresh or frozen beef (+16.2 %), coffee and tea (+13.4 %), sugar and confectionery (+8.6%), and other food preparations (+3.2%).

Prices for food purchased from restaurants rose faster in April, increasing 3.6% yearly, following a 3.2% gain in March.

Excluding food and energy, this measure of core inflation rose a less troubling 2.6% y/y, up from 2.4%

CPI ex food & energy was less troubling at 2.6% y/y (up from 2.4%).

Another area reflecting trade war pressure is that vehicle prices rose 0.9% m/m, lifting the annual rate to almost 3%—these prices dipped 0.1% for all of 2024. Auto insurance also kicked in with an unhelpful 0.9% m/m rise, lifting the annual rate to 7.7%. In the meantime, shelter costs mostly moderated, partly due to the sharp fall in natural gas prices, but it was also helped by further moderation in mortgage interest costs (6.8% y/y vs 7.9%). However, rents perked back up slightly to 5.2% y/y, after slipping for most of the past year from a peak of nearly 9%.

Bottom Line

This report will reinforce the Bank of Canada’s cautious stance on easing to mitigate the impact of tariffs. Traders in overnight swaps lowered bets that the central bank will cut rates at its next meeting, putting the odds under 40% compared with nearly 70% before the release.

It will be a close call for the Bank of Canada, but even if they don’t cut rates in June, more rate cuts this year are likely.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Global Tariff Uncertainty Sidelines Buyers

Canadian existing home sales were unchanged last month as tariff concerns again mothballed home-buying intentions, mainly in the GTA and GVA where sales have declined for months. Consumer confidence has fallen to rock-bottom levels as many fear the prospect of job losses and higher prices.

The number of sales recorded over Canadian MLS® Systems was unchanged (-0.1%) between March and April 2025, marking a pause in the trend of declining activity since the beginning of the year. (Chart A)

Demand is currently hovering around levels seen during the second half of 2022, and the first and third quarters of 2023.

“At this point, the 2025 Canadian housing story would best be described as a return to the quiet markets we’ve experienced since 2022, with tariff uncertainty taking the place of high interest rates in keeping buyers on the sidelines,” said Shaun Cathcart, CREA’s Senior Economist. “Given the increasing potential for a rough economic patch ahead, the risk going forward will be if an average number of people trying to sell their homes turns into a large number of people who have to sell their homes, and that’s something we have not seen in decades.”

New Listings

New supply declined by 1% month-over-month in April. Combined with flat sales, the national sales-to-new listings ratio climbed to 46.8% compared to 46.4% in March. The long-term average for the national sales-to-new listings ratio is 54.9%, with readings between 45% and 65% generally consistent with balanced housing market conditions.

At the end of April 2025, 183,000 properties were listed for sale on all Canadian MLS® Systems, up 14.3% from a year earlier but still below the long-term average of around 201,000 listings for that time of the year.

“The number of homes for sale across Canada has almost returned to normal, but that is the result of higher inventories in B.C. and Ontario, and tight inventories everywhere else,” said Valérie Paquin, CREA Chair.

There were 5.1 months of inventory on a national basis at the end of April 2025, which is in line with the long-term average of five months. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months and a buyer’s market above 6.4 months.

Home Prices

The National Composite MLS® Home Price Index (HPI) declined 1.2% from March to April 2025. The non-seasonally adjusted National Composite MLS® HPI was down 3.6% compared to March 2024.

The National Composite MLS® Home Price Index (HPI) declined 1.2% from March to April 2025. The non-seasonally adjusted National Composite MLS® HPI was down 3.6% compared to March 2024.

Bottom Line

Before the tariff threats emerged, the housing market was poised for a strong rebound as the spring selling season approached.

Unfortunately, the situation has only deteriorated as business and consumer confidence have fallen sharply. While the first-round effect of tariffs is higher prices as importers attempt to pass off the higher costs to consumers, second-round effects slow economic activity, reflecting layoffs and business and household belt-tightening.

The Bank of Canada refrained from cutting the overnight policy rate for fear of tariff-related price hikes. Since then, Canadian labour markets have softened, and preliminary evidence suggests that economic activity will weaken further in recent months, despite a rollback in tariffs with China, at least temporarily.

While homebuyers are leery, real housing bargains are increasingly prevalent as supplies rise and home prices fall. Sellers are increasingly motivated to make deals, and pent-up demand is growing. Outside of the GTA and GVA, sales have remained positive.

We expect the Bank of Canada to cut the overnight rate again on June 4 as long as next week’s April inflation data are reasonably well behaved, which should be the case given the sharp fall in energy prices.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Manufacturing Employment Plunged as Tariffs Weakened the Economy

Today’s Labour Force Survey for April showed a marked adverse impact of tariffs on the Canadian economy. Early evidence suggests that the slowing economy will be the primary fallout of tariffs, with upward pressure on prices a secondary impact. The central bank’s actions will mitigate inflation while gradually lowering interest rates. Today’s weak report sets the stage for a 25 bps rate cut on the June 4th decision date.

Overall employment changed little in April (+7,400; +0.0%), following a decline in March (-33,000; -0.2%) and virtually no change in February.

Following a decline of 0.2 percentage points in March, the employment rate—the proportion of the population aged 15 and older—fell a further 0.1 percentage points in April. This increased the employment rate to 60.8%, matching a recent low in October 2024.

The employment rate trended down for most of 2023 and 2024, as population growth outpaced employment gains. More recently, it increased for three consecutive months from November 2024 to January 2025, driven by strong employment gains amid slower population growth.

Public sector employment increased by 23,000 (+0.5%) in April, following three consecutive months of little change. This growth was associated with temporary hiring for the federal election.

The number of private-sector employees was little changed in April, following a decline in March (-48,000; -0.3%). Self-employment was little changed for a third consecutive month in April.

The unemployment rate rose 0.2 percentage points to 6.9% in April, following an increase of 0.1 percentage points in March. With these increases, the unemployment rate has returned to its level of November 2024, which was the highest since January 2017 (excluding the years 2020 and 2021, during the COVID-19 pandemic).

The number of unemployed people—those looking for work or on temporary layoff—increased by 39,000 (+2.6%) in April and was up by 189,000 (+13.9%) year over year.
Unemployed people faced more difficulties finding work in April than a year earlier. Among those unemployed in March, 61.0% remained unemployed in April, higher than the corresponding proportion for the same months in 2024 (57.3%) (not seasonally adjusted).

The share of workers being laid off may increase during periods of economic downturn or disruption. Among those employed in March 2025, 0.7% had become unemployed in April due to a layoff. This proportion changed little from the same period in 2024 (0.6%) (not seasonally adjusted).

There were more people in the labour force in April, and the participation rate—the proportion of the population aged 15 and older who were employed or looking for work—increased by 0.1 percentage points to 65.3%. Despite the increase in the month, the participation rate was down 0.4 percentage points on a year-over-year basis.

Total hours worked increased 0.4% in April and were up 0.9% compared with 12 months earlier.

Average hourly wages among employees increased 3.4% (+$1.20 to $36.13) year-over-year in April, following growth of 3.6% in March (not seasonally adjusted).

Employment fell in manufacturing (-31,000; -1.6%) in April, as the industry continues to face uncertainty related to tariffs on exports to the United States. Ontario posted the most significant decline (-33,000; -3.9%) in this industry among the provinces. This was the first significant decline for manufacturing employment at the national level since November 2024. Despite the decrease in the month, employment in manufacturing changed little on a year-over-year basis in April.

Wholesale and retail trade employment declined by 27,000 (-0.9%) in April, following a similarly sized decline in March (-29,000; -1.0%). The decline over the two months offset the substantial gain recorded in February. On a year-over-year basis, wholesale and retail trade employment changed little in April.

Chart 3 – Employment down in manufacturing in April

Employment rose in public administration (+37,000; +3.0%) in April, the first significant increase for the sector since July 2024. The increase was mostly in temporary work and coincided with activities associated with the federal election. Advanced polling took place from April 18 to April 21 and the election was held on April 28. The Labour Force Survey (LFS) reference week was April 13 to April 19.

In finance, insurance, real estate, rental and leasing, employment increased by 24,000 (+1.6%) in April, continuing an upward trend from October 2024, with cumulative gains during this period totalling 67,000 (+4.7%).

Bottom Line

Statistics Canada assessed the proportion of employees anticipating layoffs. Not surprisingly, employees in industries dependent on US demand for Canadian exports were more likely to anticipate layoffs. Job insecurity causes people to tighten their belts.

April is the third month in a row that the Canadian economy has seen very little change in employment or job losses, underscoring a slowdown in hiring or downsizing amid trade uncertainty. It’s also the first month that the tariff impact on export-dependent jobs in auto, steel, aluminum, and other sectors becomes more evident.

Ontario, the country’s factory heartland, saw the steepest plunge in this industry among the provinces. In Windsor, the auto industry hub, the unemployment rate jumped 1.4 percentage points to 10.7%, the highest among 20 of Canada’s largest metropolitan areas.

Traders in overnight swaps upped their bets for a rate cut at the Bank of Canada’s next decision on June 4, putting the odds at just over a coin flip after the release.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Holds Rates Steady In The Face Of Tariff Uncertainty–More Rate Cuts Coming

The Bank of Canada held its benchmark interest rate unchanged at 2.75% at today’s meeting, as expected by half of the market, to mark the first hold following 225 basis points of cuts in seven consecutive decisions. The governing council noted that the unpredictability of the magnitude and duration of tariffs posed downside risks to growth and lifted inflation expectations, warranting caution regarding the continuation of monetary easing.

The higher uncertainty stemmed from the United States’ lack of a clear tariff path, prompting the BoC Governing Council to present two economic scenarios in its latest Monetary Policy Report. Should the US limit the scope of its tariffs on Canada, the BoC expects growth to temporarily weaken and inflation to hold near the 2% target. Should the US proceed with an all-out trade war with Canada and China, the BoC has pencilled in a recession this year, and inflation rising temporarily above 3% next year.

Of course, as the Bank stated in its press release, “Many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in US trade policy are unprecedented.”

The statement says, “Serial tariff announcements, postponements, and continued threats of escalation have roiled financial markets. This extreme market volatility is adding to uncertainty. Oil prices have declined substantially since January, mainly reflecting weaker prospects for global growth. Canada’s exchange rate has recently appreciated as a result of broad US dollar weakness.”

The Bank says in these very unusual times, “In Canada, the economy is slowing as tariff announcements and uncertainty pull down consumer and business confidence. Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring. Wage growth continues to show signs of moderation.

Inflation was 2.3% in March, lower than in February but still higher than 1.8% at the time of the January Monetary Policy Report (MPR). The higher inflation in the last couple of months reflects some rebound in goods price inflation and the end of the temporary suspension of the GST/HST. Starting in April, CPI inflation will be pulled down for one year by the removal of the consumer carbon tax. Lower global oil prices will also dampen inflation in the near term. However, we expect tariffs and supply chain disruptions to push up some prices. How much upward pressure this puts on inflation will depend on the evolution of tariffs and how quickly businesses pass on higher costs to consumers. Short-term inflation expectations have moved up, as businesses and consumers anticipate higher costs from trade conflict and supply disruptions. Longer-term inflation expectations are little changed.

Governing Council will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. Our focus will be on ensuring Canadians continue to have confidence in price stability through this period of global upheaval. This means we will support economic growth while ensuring that inflation remains well-controlled.

The Governing Council will proceed carefully, paying particular attention to the risks and uncertainties facing the Canadian economy. These include the extent to which higher tariffs reduce demand for Canadian exports, how much this spills over into business investment, employment, and household spending, how much and how quickly cost increases are passed on to consumer prices, and how inflation expectations evolve.

Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What it can and must do is maintain price stability for Canadians.”

Bottom Line

The US is determined to impose worldwide tariffs, disproportionately hitting Canada, Mexico, and China, the US’s top trading partners. This is a misguided neo-Mercantilist policy. Mercantilism assumes that the global economic pie is fixed, so if one country prospers, another must fail. This idea of a zero-sum game was debunked in the 18th century by Adam Smith and others who showed that if countries have a competitive advantage in various products and services, all are better off by producing and trading those products with the rest of the world. It is not a zero-sum game. The economic pie grows with trade. This was the idea behind globalization and the USMCA free trade agreement.

Given Canada’s vulnerability to tariffs, the economy will suffer more than the US, which has a relatively closed economy (where exports are a small proportion of GDP). Prices will rise depending on the duration and size of the coming tariffs, but mitigating the inflation will be the weakness in economic activity. Stagflation, a buzzword from the 1970s, is back in the lexicon.

We expect the BoC to resume cutting the policy rate in 25-bps increments until it reaches 2.0%-to-2.25% this summer, triggering a rebound in home sales. Layoffs and spending cuts will dampen sentiment, but lower interest rates will bring buyers off the sidelines. Housing inventories have risen sharply with new condo supply and a marked rise in the new listings of existing homes, and home prices are falling.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Global Tariff Uncertainty Sidelines Buyers

Canadian existing home sales plunged last month as tariff concerns again mothballed home-buying intentions. Consumer confidence has fallen to rock-bottom levels as many fear the prospect of job losses and higher prices.

According to data released today by the Canadian Real Estate Association, existing home sales declined by 4.8% month-over-month. Along with declines in the three previous months, national home sales are now down 20% from their recent high recorded last November.

“Up until this point, declining home sales have mostly been about tariff uncertainty. Going forward, the Canadian housing space will also have to contend with the actual economic fallout. In short order we’ve gone from a slam dunk rebound year to treading water at best,” said Shaun Cathcart, CREA’s Senior Economist.

While the largest of these declines has been seen in Ontario and British Columbia, sales have been down over the last few months in all but a handful of small markets across the country.

On a non-seasonally adjusted basis, the overall Canadian sales total for March 2025 fell 9.3% year-over-year and was the lowest for that month since 2009.

New Listings

New supply moved up by 3% month-over-month in March. Combined with the decrease in sales, the national sales-to-new listings ratio fell to 45.9% compared to 49.7% in February. The March level for this measure of market balance is the lowest since February 2009. The long-term average for the national sales-to-new listings ratio is 54.9%, with readings between 45% and 65% generally consistent with balanced housing market conditions.

At the end of March 2025, 165,800 properties were listed for sale on all Canadian MLS® Systems, up 18.3% from a year earlier but still below the long-term average (around 174,000 listings) for this time of year.

“While the trend of falling monthly sales has been observed across Canada over the last few months, there are still many regions where sales are high, inventory is near record lows, and prices are rising,” said Valérie Paquin, newly installed Chair of CREA’s 2025-2026 Board of Directors. “There are also parts of the country with historically low sales and the highest inventory levels in a decade or more.”

At the end of March 2025, there were 5.1 months of inventory nationwide, the highest level since the early months of the pandemic. The long-term average for this measure is five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) declined by 1% from February to March 2025, marking the largest month-over-month decrease since November 2023.

The renewed price softening was most notable in British Columbia and Ontario’s Greater Golden Horseshoe. Prices have continued to push higher across much of the Prairies, Quebec, and the East Coast.

The non-seasonally adjusted National Composite MLS® HPI was down 2.1% compared to March 2024.

The non-seasonally adjusted national average home price was $678,331 in March 2025, down 3.7% from March 2024.

Bottom Line

Before the tariff threats emerged, the housing market was poised for a strong rebound as the spring selling season approached.

Unfortunately, the situation has only deteriorated as business and consumer confidence have fallenen sharply. While the first-round effect of tariffs is higher prices as importers attempt to pass off the higher costs to consumers, second-round effects slow economic activity, reflecting layoffs and business and household belt-tightening.

The Bank of Canada will undoubtedly come to the rescue this year by further slashing interest rates. This is particularly important for Canada, where interest-rate sensitivity is far higher than in the US. But traders are betting that the odds of another 25 bps rate cut tomorrow are no better than even.

The economy is slowing, and inflation fell more than expected in March. Next month’s inflation data are also likely to improve, reflecting the elimination of the carbon tax. This keeps the possibility of an April rate cut open, but even if the Bank of Canada takes a pass this month, we estimate they will cut the overnight rate three more times this year, taking it down 300 bps from its peak last year. This will finally spur buyers off the sidelines, but the timing of this rebound is more uncertain than usual, given the chaos in the White House.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weaker Than Expected Inflation May Not Be Enough to Trigger Another Bank of Canada Rate Cut Tomorrow

Canadian consumer prices rose 0.3% in March (or remained flat when seasonally adjusted), which was lower than expected, reducing the annual inflation rate by 0.3 percentage points to 2.3%. This decrease in headline inflation followed the complete removal of the GST holiday in March.

There was a significant drop in travel tour prices and airfares compared to the previous year, as Canadians reduced their travel to the U.S. during peak times. Additionally, gasoline prices fell by a modest 1.8%, with further declines expected in April, likely bringing the headline inflation rate below 2%.

The core measures largely met expectations last month, with the trimmed rate decreasing moderately to 2.8% and the median rate holding steady at 2.9% year-over-year. Although these annual numbers remain high, the monthly results were more encouraging, increasing by just 0.1% month-over-month on a seasonally adjusted basis. Moreover, their three-month trend eased to below 3%.

Prices excluding food and energy dipped slightly, reducing the traditional measure of core inflation to 2.4% from 2.9%. Travel tour costs dropped 8% month-over-month (or 4.7% year-over-year), and airfares fell 12% year-over-year. Cellphone service costs also decreased by 7% year-over-year. March saw the beginning of some Canadian counter-tariffs, leading to price increases in areas like sporting equipment, which rose 12.2% year-over-year. However, declines in travel and gasoline costs overshadowed these price upticks.

Shelter costs also showed signs of easing—rents slowed to 5.1% year-over-year from 5.8%, and mortgage interest costs reduced to 7.9% from 9.0%.

Bottom Line

This report will reinforce the Bank of Canada’s cautious stance on easing to mitigate the impact of tariffs. Canada experienced a break in rising inflation in March due to lower travel costs. The inflation impact of the trade war differs for Canada compared to the U.S., as Canadian tariffs are lighter, and the domestic economy is under more significant pressure.

The strengthening Canadian dollar helps reduce import prices, addressing one of the Bank of Canada’s inflation concerns. Gasoline prices fell sharply on April 1 following the removal of the carbon tax. They continued to decline due to dropping global oil prices, which may lead to a significant decrease in headline inflation next month. Despite these conditions potentially signalling a favourable situation for the BoC to cut rates, core inflation measures are still close to 3%, and ongoing trade war dynamics complicate policymaking decisions.

The odds of a ninth rate cut tomorrow are about even. Recent reports suggest that business and consumer confidence has deteriorated and that spending is slowing. Nevertheless, the central bank remains concerned about the inflationary impact of tariffs.

Even if the Bank does not cut rates in April, we will likely see three more 25-basis-point cuts this year, bringing the overnight rate down to 2.0%—300 bps lower than its peak last year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weak Canadian Job Creation Is The First Fallout From The Trade War

Today’s Labour Force Survey for March was weaker than expected. Employment decreased by 33,000 (-0.2%) in March, the first decrease since January 2022. The decline in March followed little change in February and three consecutive months of growth in November, December and January, totalling 211,000 (+1.0%).

The employment rate—the proportion of the population aged 15 and older—fell 0.2 percentage points to 60.9% in March. This partially offsets an increase of 0.3 percentage points observed from October 2024 to January 2025.

Private sector employment fell by 48,000 (-0.3 %) in March, following little change in February and a cumulative increase of 97,000 (+0.7%) from November 2024 to January 2025. On a year-over-year basis, the number of employees in the private sector was up by 175,000 (+1.3%).

Public sector employment was little changed for a third consecutive month in March, up 92,000 (+2.1%) compared with a year earlier. Self-employment was also little changed in March, up 81,000 (+3.0%) on a year-over-year basis.

Economists expected the trade war to weigh on the Canadian labour market in March. Market participants expected zero employment gains as steel & aluminum tariffs hit jobs in the sector. While we haven’t seen broad-based layoffs yet, automaker Stellantis NV temporarily halted production at assembly plants in Windsor, ON and Mexico, laying off 3,200 people in Canada, 2,600 in Mexico and 900 at six U.S. factories. The pressure from those and broader non-USMCA-compliant tariffs was expected to drive stagnant job growth in the month. At 6.7%, the jobless rate met expectations, still two ticks shy of November’s cycle high.

Employment could experience a further downside over the coming months, depending on how the tariff backdrop evolves. Average hours worked could see an even bigger hit as work-sharing programs come into effect due to pressure on manufacturing production.

The unemployment rate rose 0.1 percentage points to 6.7% in March, the first increase since November 2024. It had trended up from 5.0% in March 2023 to a recent high of 6.9% in November 2024 before falling by 0.3 percentage points from November 2024 to January 2025 in the context of robust employment growth at the end of 2024 and in early 2025.

Since March 2024, the unemployment rate has remained above its pre-COVID-19 pandemic average of 6.0% (from 2017 to 2019).

In total, 1.5 million people were unemployed in March, up 36,000 (+2.5%) in the month and up 167,000 (+12.4%) year over year.

Among those unemployed in February, 14.7% became employed in March. This was lower than the corresponding proportion in March 2024 (18.6%) (not seasonally adjusted).

Long-term unemployment has also risen; the proportion of unemployed people searching for work for 27 weeks or more stood at 23.7% in March 2025, up from 18.3% in March 2024.

Total hours worked rose 0.4% in March, following a decline of 1.3% in February. On a year-over-year basis, total hours worked were up 1.2%.

Average hourly wages among employees were up 3.6% (+$1.24 to $36.05) year over year in March, following growth of 3.8% in February (not seasonally adjusted).

Wholesale and retail trade employment fell by 29,000 (-1.0 %) in March, partly offsetting an increase of 51,000 in February. On a year-over-year basis, the number of people working in wholesale and retail trade was little changed in March.

Employment declines led by wholesale and retail trade in March

Following five months of little change, employment in information, culture, and recreation decreased by 20,000 (-2.4%) in March. Despite the decline, employment in this industry changed little on a year-over-year basis.

In March, employment also fell in agriculture (-9,300; -3.9%), while there were gains in “other services” (such as personal and repair services) (+12,000; +1.5%) and in utilities (+4,200; +2.8%).

Bottom Line

US employment data for March were also released this morning. In direct contrast to Canada, US job growth beat forecasts in March, and the unemployment rate edged up, pointing to a healthy labour market before the global economy gets hit by widespread tariffs.

Canada’s job market stalled in March, shedding the most jobs in over three years. The job loss was the first in eight months, with trade-exposed sectors driving some declines.

The threats and implementation of US President Donald Trump’s tariffs and Canada’s retaliating levies have weighed on the Canadian jobs market over the past two months. However, with the country dodging the latest round of so-called reciprocal tariffs this week, the Bank of Canada may have more time to weigh economic weakness against rising price pressures.

Stocks have fallen the most since March 2020–the beginning of Covid, and bonds are rallying causing market-driven interest rates to drop precipitously. The Bank of Canada meets again on April 16. The day before, Canadian inflation data for March will be released. This will be a crucial report as the central bank assesses the tug-of-war between tariff-induced inflation and unemployment. Currently, traders are betting there is only a 33% chance of a 25 bps rate cut later this month. While the BoC might take a pass this month, the coming slowdown in the Canadian economy will warrant rate cuts in June, if not sooner.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca