Unfortunately, this trend probably won't end any time soon. With business investment slowing markedly, the growth in personal expenditures declining and Canada's public sector poised to cutback on hiring during budget season, it's doubtful that things will improve in the short-term.
But what about the longer term? Here too, there isn't much to be optimistic about. The reason for that is because, within the next few years, households will embark on a period of deleveraging during which households will seek to pay down debt and increase savings, as recently highlighted by the Governor of the Bank of Canada. And when households reach that point, the economy will likely encounter a considerable setback that will lead to weakening employment growth. This will be especially apparent if businesses don't increase their level of investment and exports stay at their current levels. Public sector austerity and deficit reduction will only worsen the situation.
To illustrate this point, I thought it would be useful to include the following charts showing the rate of unemployment along with Canada's household sector balance (click on charts to enlarge)*. As you can see, the rate of unemployment and the household sector balance tend to move in tandem: whenever the household sector balance trends upward (downward), the unemployment rate rises (falls).
|Chart 1, Source: Statistics Canada|
|Chart 2, Source: Statistics Canada|
Now, it should be pointed out that this relationship runs both ways. On the one hand, higher (lower) unemployment reduces (increases) household spending, and, one the other hand, increased (reduced) consumption by households helps to boost (weaken) the economy and increase (decrease) employment.
But given that growth in consumer credit is at the lowest it's been in over two decades and that owner's equity as a share of real estate is declining rapidly (which reduces households' ability to finance consumption using equity in their homes, see chart 3), it seems reasonable to believe that it's the rise in the household sector financial balance that will create upward pressure on unemployment rather than the other way around.**
|Chart 3, Source: Statistics Canada|
To conclude, the implication here is that the federal government's intention to move forward with austerity at this time is ill-advised. Unless the decline in the household sector's participation in economic growth is not offset by that of another sector (government, foreign or business), weak employment growth will likely last longer than most people expect.
* A sector's net financial balance is the difference between sectoral savings and investment. Reduced household consumption and investment, as well as higher savings increase the financial balance of the household sector.
**For those who are interested in this type of analysis, I strongly recommend the work of economist Josef Steindl. According to Steindl, the examination of sectoral financial balances provides a useful framework for the analysis of macroeconomics. Also, Steindl viewed the household sector's propensity to save as an important determinant of economic growth.
Steindl, Josef. 1982. “The Role of Household Saving in the Modern Economy”, Banca Nazionale del Lavoro Quarterly Review, Vol. 35, no. 140 (March), pp. 69-88