The release of the December employment report last Friday and today’s investment survey for 2018 have upped the odds that the Bank of Canada (BoC) will raise rates at its January 17th meeting.  Canada created 79,000 jobs in December and this brought the national unemployment rate down to 5.7%. The Bank of Canada’s survey of business intentions provided a relatively positive outlook for 2018. Accordingly, the economists from the Big Six banks say that Governor Poloz has reason enough to raise rates at its next meeting.

Let’s look at the labor market survey numbers. Many economists, myself among them, who have covered the Canadian economic scene for more than three decades, do not place much credence in Statistics Canada labor force data.  For the American readers, you can consider an increase of 79,000 jobs in one-month equivalent to the U.S economy generating 800,000 jobs or 4 times what it has created on average over the past two years.

The Canadian number for December simply does not make sense in the context of the North American economy. Moreover, within the 79,000 jobs created some 55,000 were part-time workers, many no doubt working as temps during the holiday season. The swing factor between part-time and fulltime has always been large, causing a distortion in the employment picture. Notwithstanding, the drop in unemployment signals that the economy is closing the output gap.

Turning to the investment survey, the improvement in the outlook for business investment has to be put into context. The report offers a set of mixed data to digest. Capacity pressures are building up and this should encourage more investment and employment growth. However, 40% of respondents did not expect sales volumes to grow in 2018. Moreover, participants referred to the difficulty in raising prices for fear of losing out to competitors. As a consequence, inflation expectations are modest and remained unchanged from the previous quarter.  

These two survey results ---- employment growth and business investment---measure the supply side of the economy. In Canada after the 2008 crisis this supply capability dropped considerably. Energy companies folded with the collapse of oil prices in 2014 and have not fully recovered from that deep slump. Other sectors also were affected by the downturn and are slowly working to restore lost capacity. The issue facing a central bank is simple: how does raising interest rates promote the expansion of the supply side of the economy. We will find out soon how the BoC tackles this issue.