Canada's economy appears on track for another modest expansion in May, with Scotiabank pointing to a 0.6% month-over-month increase in hours worked as an early indicator. The data, released by Statistics Canada, offers a preliminary glimpse into the country's economic trajectory, though the bank cautions that productivity trends and June figures remain significant uncertainties.
Hours Worked as a Leading Indicator
Hours worked are a closely watched proxy for economic activity because they capture the total labor input across the economy. When Canadians work more hours, output typically rises, all else being equal. Scotiabank's head of capital markets economics, Derek Holt, uses this metric as a starting point for estimating gross domestic product (GDP) growth. The 0.6% monthly gain in hours worked suggests that May's GDP could follow April's advance estimate of 0.4% month-over-month growth, though the final figure will depend on other factors.
However, the relationship between hours worked and GDP is not one-to-one. Productivity—the amount of output generated per hour worked—plays a critical role. If productivity declined in May, the GDP gain could be smaller than the hours-worked increase implies. Conversely, a productivity boost could amplify the growth. Scotiabank's warning highlights that productivity data, which is released with a lag, remains a key unknown.
Broader Economic Context
Canada's economy has been navigating a period of moderate growth amid headwinds from high interest rates and persistent inflation. The Bank of Canada has held its benchmark interest rate at 2.25% since March, as it balances the need to curb inflation with the risk of stifling economic activity. The central bank's next rate decision, scheduled for July, will be closely watched by investors for clues on the policy path.
Recent labor market data has sent mixed signals. While hours worked rose in May, other indicators, such as wage growth and employment levels, have shown signs of softening. A detailed analysis of Canada's jobs data reveals that the labor market is not as tight as it appears, with hidden slack emerging as part-time work and underemployment rise. This complexity makes it difficult to gauge the economy's true momentum.
Productivity has been a persistent concern for Canada. The country has struggled with weak productivity growth for years, which limits the economy's potential to expand without fueling inflation. If May's productivity data disappoints, it could reinforce the view that Canada's growth is fragile and reliant on adding more hours rather than becoming more efficient.
What It Means for Investors
For everyday investors, the May GDP data is more than just a number—it influences the Bank of Canada's interest rate decisions, which in turn affect borrowing costs, corporate profits, and stock market performance. A stronger-than-expected GDP reading could reduce the likelihood of a rate cut, potentially boosting the Canadian dollar and bank stocks but weighing on rate-sensitive sectors like real estate. Conversely, a weaker reading might increase expectations for monetary easing, which could support bond prices and growth-oriented stocks.
Scotiabank's caution about June data adds another layer of uncertainty. Investors should watch for the official GDP release from Statistics Canada, expected in late July, as well as upcoming labor market reports. The Bank of Canada's recent rate hold reflects its cautious stance, and any signs of economic weakness could shift the balance toward a cut later this year.
Productivity trends are particularly important for long-term investors. If Canada can improve its productivity, it would support higher wages and corporate earnings without stoking inflation. However, if productivity remains stagnant, the economy may struggle to grow sustainably, limiting returns for Canadian equities. The aging population adds further pressure, as a shrinking workforce requires higher productivity to maintain living standards.
Looking Ahead
The May GDP report is just one piece of the puzzle. Investors should also consider the impact of global factors, such as commodity prices and trade tensions, on Canada's economy. The recent plunge in oil prices has eased inflation fears but could hurt Canada's energy sector, a major driver of economic growth. Meanwhile, the Bank of Canada's consultation on its inflation target shows strong public backing for the 2% goal, suggesting that the central bank will remain focused on price stability.
In the near term, the key question is whether May's GDP growth can be sustained into June and beyond. Scotiabank's warning about unknown June data underscores the importance of staying diversified and avoiding overreaction to any single data point. For now, the Canadian economy appears to be chugging along at a modest pace, but the path ahead remains uncertain.
