Rather than signaling a setback, December's modest employment gain and rising unemployment rate reinforce our view that Canada's labor market recovery is underway but will likely prove choppy, with slack absorbed only gradually over time, Royal Bank of Canada Senior Economist Claire Fan reports.

December employment gains modest as unemployment rises

"Employment grew by just 8,000 in December, following a robust 181,000 increase over the prior three months. The unemployment rate rose to 6.8% from 6.5%, driven primarily by a jump in the share of the population looking for work rather than an increase in layoffs. Even at 6.8%, the rate remains below October's 6.9% and September's recent peak of 7.1%."

"Trade-exposed sectors, particularly manufacturing and transport and warehousing, experienced persistent job losses over the summer but showed stabilizing conditions by year-end. In December, combined employment in these two sectors was essentially flat month-over-month and 22,000 above December 2024 levels."

"Overall, this report signals gradual improvement in the Canadian labor market backdrop that aligns well with Bank of Canada expectations, and supports their near-term holding bias. We expect the central bank will hold rates steady this year before hiking in 2027."