What September’s 68,000 Job Losses Signal for the Canadian Economy

News Analysis

Canada’s labour market has shed 110,000 jobs over the past two months, but with rising energy costs adding to inflationary pressures, it remains to be seen whether the Bank of Canada will cut interest rates to support a softening economy or raise them, with implications for mortgage rates.

Statistics Canada announced on Oct. 9 that employment fell by 68,000 in September, following a loss of 42,000 jobs in August. The unemployment rate rose from 6.4 percent to 6.5 percent.

The job losses come amid uncertainty over Canada’s trade relationship with the United States and rising energy costs, creating a dilemma for the Bank of Canada: whether to lower interest rates to support a weakening economy or raise them to contain inflation.

While some economists caution against reading too much into the latest job numbers, noting possible volatility from seasonal changes, concern remains that further trade uncertainty and other factors could deepen the downward trend in the months ahead, especially as the effects of tariffs accumulate over time.

Carleton University business professor Ian Lee said September’s job losses were concentrated in the public sector and were not primarily caused by the latest 50 percent tariffs the United States imposed on several Canadian sectors in August.

“I’m not trying to tell you that the most recent tariffs are not going to hurt us. I think they are. It just hasn’t shown up yet in the data,” he said.

Job Losses

Canada shed 35,000 jobs in educational services in September, along with 23,000 in health care and social assistance, and 13,000 in manufacturing. By contrast, employment in other services, including repair and maintenance as well as personal and household services, increased by 17,000.

Lee said the latest job losses were “mostly in the public sector, and we don’t put tariffs on government bureaucrats.” He suggested that employers in health care and education could increasingly use AI to reduce staffing costs.

“I think that we’re going to see, over the months ahead, further unemployment being created by the application of AI in the organizational charts of companies and organizations. They’re going to make do by reconfiguring what they’re doing and automating to use less people,” he said.

An Oct. 9 report by RBC Economics cautioned against drawing firm conclusions from September’s job numbers, stating that “monthly employment counts are notoriously volatile, and there are reasons not to read too much into the softer reading too quickly.” The report said that around 70 percent, or 48,000, of the job losses in September were among Canadians aged 15 to 24, a cohort that “typically sees seasonal headwinds around this time of year after the school year starts.”

The report added that while education has seen “persistent losses” in 2026, the health-care and social assistance sectors have seen net growth of 93,000 jobs from a year ago. It also noted that manufacturing employment has “mostly held steady” amid the new U.S. tariffs.

Livio Di Matteo, professor of economics at Lakehead University and senior fellow at the Fraser Institute, also cautioned against attributing the job losses to the trade dispute, noting that most of the declines were in the public sector.

“Overall we would need to see a few more months of data to see if a longer-term trend of employment decline emerges,” he said.

Uncertainty Over Interest Rates

The Bank of Canada has held its policy rate at 2.25 percent for seven consecutive meetings. At the September meeting, Governor Tiff Macklem warned that higher oil prices and U.S. tariffs were adding to inflationary pressures and that higher interest rates might be needed.

Macklem’s warning marked a shift from June and July, when he said U.S. tariffs could weaken economic growth and create a need for further rate cuts. In September, he described Canada’s economic growth as “encouraging.”

Ron Butler, owner of Butler Mortgage and host of the Angry Mortgage podcast, said the weakness in the Canadian economy is being accompanied by inflationary pressures due to higher energy prices. He said the Bank of Canada may be forced to raise interest rates soon, which would also increase borrowing costs for Canadians.

“With other central banks increasing their [interest] rates around the world, Canada can only be left behind for so long, if our inflation rates do tick up,” Butler said. “More bad employment news is not necessarily going to save any of that if the inflation keeps going up.”

Butler said Statistic Canada’s inflation reports on Oct. 19 and Nov. 16 will be “critical” to determining whether the central bank will raise interest rates in 2026.

“If there is a clear surge in both headline and core inflation, it’s going to be hard to avoid some increases,” he said.

Canada’s annual inflation rate was 3 percent in both July and August, compared to the Bank of Canada’s target rate of 2 percent.

Lee, by contrast, said the central bank is more likely to cut interest rates further to support the economy, as he projects further job losses in 2027. He said the federal government could also introduce support programs similar to those implemented during the COVID-19 pandemic.

“Yes, the inflation may still be there, but you have to make choices. And if the unemployment rate goes up significantly, to 7 percent or 11 percent, I can’t see them increasing interest rates,” Lee said.

Fuel Costs, Weaker Dollar Threaten Food Prices

Sylvain Charlebois, professor of food distribution and policy at Dalhousie University, said that the latest jobs report signals a weakening economy and that a lower Canadian dollar could raise the cost of food imports. At the same time, he said food prices are continuing to see upward pressure due to higher diesel prices.

Charlebois said food inflation will remain elevated in the months to come, particularly due to high diesel costs stemming from the U.S.-Iran War. Diesel futures are at all-time highs, at nearly US$5 per gallon compared to around US$2.30 in mid-February, about two weeks before the start of the U.S.-Iran War.

He said that if diesel prices remain at current levels, then additional costs for transportation could add an extra 0.6 percentage points to inflation by April 2027. 

Charlebois said a weakening Canadian economy could put downward pressure on the dollar and make imported food more expensive, particularly during the winter. He warned that a decline of the Canadian dollar from the current 70 cents U.S. to 68 cents U.S. could increase food inflation.

“If the dollar drops to say 68 cents U.S., then we could see a bump in produce prices. The lower the loonie gets, the higher prices will go in certain parts of the grocery store,” he said.

Grocery store food inflation rose by 2.8 percent year over year in August, down from 3.1 percent in July. That was also the first time since July 2024 that the annual grocery price growth increased at a slower rate than that of the consumer price index, which was at 3 percent in August 2026. However, Statistics Canada noted that grocery prices were still 29 percent higher than in August 2021.