Spotlight on Inflation and Digital Labour Market Dynamics
The holidays are typically a time for indulgence, but Canadian businesses and households have been focused more on belt-tightening this year. A combination of factors—expansive monetary and fiscal stimulus during the pandemic, pent-up demand from the lockdowns of 2020 and 2021, global supply chain disruptions, and the war in Ukraine—has led to inflation in 2022 reaching levels last seen in the early 1980s. While the Bank of Canada has been trying to keep inflation from spiralling through a series of interest rate hikes in 2022, the speed of interest rate increases and the persistence of inflationary pressures has meant that most Canadians expect an economic slowdown in 2023.
Inflation has started to come down from its peak in June but remains significantly elevated (well above the Bank of Canada’s target range) and broad-based. Additionally, while energy and commodity prices have eased in the past few months, there remains significant uncertainty in the short term. Furthermore, inflation expectations in the short and medium term also remain entrenched at levels well above the Bank’s target range of 1-3%, implying that interest rates are likely to remain high in the near term, and might even increase further in the coming months.
Increased monetary tightening coupled with the erosion of purchasing power due to inflation will undoubtedly dampen household spending and residential investment. Latest estimates of household economic accounts already show that household savings have declined compared to 2020 and 2021 for households of all income levels. The Canadian housing market has also been cooling over recent months. However, this is not entirely surprising given the steep run-up in prices post-COVID, and there are regional exceptions to the overall trend. With further interest rate hikes still a possibility, the housing market will continue to slow.
Although most industry sectors have recovered to, and even surpassed, pre-pandemic GDP levels, output growth has tapered off in the second half of 2022. Barring a few service sectors, most industries in Canada saw month-over-month growth trickle to a halt by end-2022 as the combined effect of interest rate hikes and persistent inflation curbed demand. Softening domestic demand coupled with slowdowns in international trade and cooling demand in the U.S. and other key trading partners in Europe and Asia are also dampening business outlook. Several Canadian business sentiment trackers show a decline in the short-term outlook. Results from the Bank of Canada’s latest Business Outlook Survey show that an increasing number of Canadian businesses expect to see declines in sales this year. Higher financing costs and uncertainty are also likely to weigh on business investment and expansion plans.
That said, not all signals are negative. The labour market remains tight, with high job vacancies persisting despite rising unemployment, however, this likely points to a longer-term issue related to Canada’s aging population. Discretionary spending on services such as travel and recreation, especially from high-income households, which have seen increases in disposable income, is likely to remain relatively strong despite inflationary pressures. Interestingly, the OECD’s real-time GDP growth tracker has been showing an uptick in recent economic activity in Canada. For the time being, at least, several sectors in Canada continue to experience a trend of low unemployment and relatively high job vacancies, but this might change in the short run as fewer Canadian businesses have reported facing labour shortages in the past few months.
Focusing on the tech sector, we have seen that news of major layoffs in large global tech players is fuelling a conversation about whether the sector is generally in a longer-term contraction. In 2022, there were over 5200 reported layoffs in Canada’s tech sector, and since May 2022, Indeed is reporting that tech-related job postings are down around 32% but still remain above 2020 levels. Three overarching themes seem to tie these layoffs together: changing macroeconomic conditions, company-level structural changes, and adjustments to pandemic hiring.
Increasing interest rates have led to firms shoring-up operations, as spending and investment expectations change. Amazon has recently announced a new round of layoffs totalling 18,000 in its e-commerce and HR divisions, citing changing consumer spending expectations related to interest rates. In Canada, smaller tech startups are laying off workers to build resilience into their operations. Young tech firms are being told that venture capital is bracing for changing financial market conditions stemming from interest rates, and as a result, there will be less funding to go around. In some cases, these firms are told that they may need to survive two years without additional investment. What is yet to be determined is the effect of the increasing value of the U.S. dollar on the Canadian talent market. A stronger USD can affect tech employment in Canada in two ways: on the one hand, USD wages become more attractive to Canadian talent, making it easier to lure to them the U.S.; while at the same time, setting up or expanding operations in Canada also becomes relatively cheaper for U.S. companies.
Other layoffs to make the news have been driven by company-level structural changes at big-tech firms. Notably, Facebook (Meta) layoffs are driven by its push into virtual reality and challenges around advertisement and privacy. Whereas Twitter layoffs are part of a larger restructuring to an engineering-driven culture and talent strategy under the new owner, Elon Musk. These layoffs have less to do with current economic conditions but have come at a time when any tech layoffs drive concern.
The last theme relates to pandemic-era hiring when increased demand for digital services was spurred by the transition to working from home and the closure of non-essential businesses. Shopify made the news in July when it laid off a thousand workers earlier this year, but official communication from Shopify indicated it was over-ambitious in hiring and overestimated the extent to which e-commerce would grow as it managed a surge in demand for services during the pandemic. Digital services that boomed during the closures are now facing a market correction and, as a result, are laying off staff due to the reopening of in-person spaces.
While labour market data for digital occupations in Canada does bear out this story of a market correction, there are still plenty of job vacancies in these occupations. In fact, several key digital occupations remain in excess demand in Canada, with job vacancies outnumbering unemployed workers. As shown in the grey region of the chart below, key digital occupations such as information systems analysts and consultants (data scientists, cybersecurity professionals, etc.), computer programmers and interactive media developers (software developers, game developers, etc.), and computer and information systems managers (product managers, technical managers, etc.) are all still in short supply.
Despite the uncertainty and economic pessimism in the near term, the medium-term demand outlook for Canada’s digital economy remains positive. Moreover, the impetus to tackle the global climate challenge and transition to a carbon-neutral economy presents additional opportunities for Canada’s cleantech, agtech, and clean resources sectors. Unlocking these will require a concerted effort from the private and public sectors, with supportive policy focused on enabling research and technology development, financing, and skills development.
On the supply side, Canada has some key ingredients in place already. These include world-class education and research institutions, abundant reserves of critical resources, well-established industry bases in agriculture, energy, and renewables, and a strong pool of human capital. Of the G7 nations, Canada has the largest share of the working-age population with college or university credentials, at 57.5%. From 2016 to 2021, just over 1.3 million new immigrants settled permanently in Canada and accounted for four-fifths of Canada’s labour force growth. Over the last five years, the percentage of the working-age population with a bachelor’s degree or higher in Canada increased by 4.3% to 32.9%. Immigrants who had landed in Canada since the 2016 Census were responsible for 2.1% of the 4.3% growth, with 59.4% of admitted working-age immigrants having a bachelor’s degree or higher.
These characteristics provide solid fundamentals that could help support the growth of Canada’s digital economy, but some key issues need to be resolved. The demand for skilled trade workers reached a record high in 2022, and this trend is expected to continue over the next few years as the last of the baby boomers, who represented 30% of skilled trade workers in the 2021 Census, will soon retire. This threatens Canada’s digital economy because it relies on the infrastructure built by skilled trade workers. Additionally, as immigrants help raise education levels in Canada, they are twice as likely to be overqualified as those with a Canadian degree. Ensuring that immigration pathways recognize foreign degrees and skills—a longstanding issue—remains pivotal to Canada leveraging the competitive advantage of its labour force.