'Ends recession debate': economists weigh in on the latest jobs report – Financial Post

Beyond the optimistic headlines, some economists argue that the Canadian economy is barely scraping by
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Canada’s jobless rate fell to 6.6 per cent in May as 88,000 positions were added into the economy, the first significant employment gain since November 2025, according to Statistics Canada’s labour force survey data released Friday.
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Here’s what economists had to say about the latest data and what it means for the Bank of Canada’s future interest rate decisions.
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The latest jobs numbers just about ends the recession debate, said Chartered Professional Accountants of Canada’s chief economist, David-Alexandre Brassard. The May report significantly beat expectations, bringing employment close to flat for 2026. The scale of job creation, particularly in full-time roles, points to improving economic conditions rather than a downturn, he said.
“This is a blockbuster report that seemingly wipes away recession fears and points to a rebound in the second quarter following two quarters of contraction,” said Brassard, noting that the gains were broad-based, driven by sectors outside the public sector and industries impacted by tariffs.
He said the report also shows easing wage pressure, as a surge of new jobs helps slow wage growth caused by earlier labour market tightness.
“That resilience comes as Canada looks ahead to the renewal of CUSMA,” he says. “We’re in a stronger position heading into these discussions, which is extremely important given ongoing global trade pressures.”
TD Economics director and senior economist Andrew Hencic said the unemployment rate tumbling in May handily beat consensus expectations for a 10,000 gain, as employment gains outpaced labour supply. The labour force was little changed at 3,800, leaving the participation rate unchanged at 65 per cent.
“No bones about it, this is a solid report,” said Hencic. “However, this basically brings employment back to where it was in January, with an unemployment rate 0.1 percentage points higher.”
He said there continues to be a lot of noise in the Canadian economic data, including the “disappointing” surprise contraction in first quarter GDP. But with April’s flash GDP estimate signalling a 0.4 per cent monthly gain and now May’s labour force report, he continues to expect a second quarter bounce-back in activity.
He added that the economy is nonetheless operating below capacity, providing a disinflationary offset to the energy price shock. With this backdrop he expects the Bank of Canada to stay on the sidelines next week and keep its policy rate at 2.25 per cent.
Royce Mendes, Desjardins Economics managing director and head of macro strategy, was a bit more cautious. He said the labour market showed signs of life in May with a strong rebound in job creation, which largely reverses the losses observed earlier in the year and the level of employment now just shy of its December 2025 peak.
Yields across the Government of Canada curve are rising, led by the short end where traders are now pricing in between one and two rate hikes for the remainder of this year, he added.
“That said, given the volatility in the Labour Force Survey, it’s difficult to have much confidence in the signalling power of today’s reading,” said Mendes. “We continue to see downside risks for the Canadian economy both from fundamental weakness and trade negotiations.”
Royal Bank of Canada assistant chief economist Nathan Janzen said May’s larger-than-expected increase in employment and drop in the unemployment rate is a welcome upside surprise, after the concerns around an unexpectedly soft GDP report for Q1 last week.
Still, the jump in employment in May was just the second increase in the last five months, he said, which still left the employment count slightly down year-to-date in 2026. He argued that a sharp slowing in population growth is distorting the historical comparison of employment growth, as around 26,000 workers retired per month over the last year, and caps on temporary resident arrivals are reducing the supply of workers available from abroad.
“Looking ahead, the economic growth backdrop still faces headwinds,” Jensen said, pointing to the trade uncertainty ahead of negotiations to extend CUSMA and higher energy prices cutting into household purchasing power. “But we remain cautiously optimistic that per-person economic growth and labour market conditions will continue to gradually improve this year, with the unemployment rate edging broadly lower,” he said.
Bank of Montreal’s managing director for Canadian rates and macro strategist, Benjamin Reitzes, said the employment surge in May should silence the recession crowd, with the economy hanging in there despite the headwinds from trade and energy prices.
“Just when you think Canada is crumbling amid a string of negative data points, things reverse,” Reitzes said. “We’ve seen this story a few times in the past year. The economy isn’t booming, but it isn’t falling apart, either.”
The May jobs data is “an unambiguously strong report… Canada continues to hold in,” he said, and it should somewhat ease Bank of Canada worries about the economy after the negative GDP print. Still, he said the back-to-back negative GDPs, lower oil and tame core CPI point to a less hawkish (Bank of Canada decision) next week than in April…though the shift will be less material than if the May report was weak.
Capital Economics senior North American economist Ariane Curtis said the strength evident in Canada’s labour market increases the chance of rate hikes this year. She said the strong rebound in employment and the fall in the unemployment rate will provide some relief to the Bank of Canada that the economy is not in or on the verge of recession.
“While wage growth slowed, the strength in the labour market presents a risk to the view that the Bank of Canada will keep rates on hold this year,” she said.
Indeed Canada’s senior economist Brendon Bernard said May’s strong numbers are a good reminder of how a brewing trend in the labour force survey can reverse with just one data release. The slide in full-time job growth that started in February has reversed, and the 0.3-point drop in the unemployment rate almost brings it back to where it started the year.
However, this isn’t particularly good news, he said, as the challenges facing Canadian job seekers persist. The weak momentum that began the year was probably overstated, in part because the fourth quarter of 2025 was surprisingly strong, and now, he says, we’re back to baseline.
“Labour market watchers can breathe a sigh of relief. The employment situation showed a nice rebound in May, reversing a weak start to the year,” said Bernard. He noted that job postings on Indeed have been fairly steady over the past year, which suggests stable conditions in the broader labour market.
David Watt of Rosenberg Research & Associates Inc. said that beyond the optimistic headlines, the economy is barely scraping by.
He said that most of the increase in full-time jobs came in the youth category, which jumped by 98,700 — a very rare occurence, and notable given the many stories about the employment challenges facing young Canadian workers. Watt doesn’t think those challenges are gone, and, given the saw-tooth pattern of data from the May report, expects the June jobs numbers might tell a different story.
“This is not the backdrop for a central bank to even consider raising rates,” he said. “Instead, it suggests keeping open the option that they might need to ease.”
Watt added that he thinks the sell-off in the two-year bond that lifted its yield to 2.90 per cent will be unwound as folks take a closer look at the report.
• Email: dpaglinawan@postmedia.com
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