Monthly Economic Letter

The Canadian job market is slowing down. Although the situation isn’t alarming yet, it’s important for entrepreneurs to be aware of the weakening employment picture and the factors driving it. 

Strong employment stimulates consumer spending and is a key driver of growth. It also makes households more resilient to economic turbulence and sustains the tax revenues that finance public services. By contrast, a slowdown can mean weaker sales for businesses and a changing human resources environment.

Trade relations between Canada and the United States continue to be tense and much uncertainty remains. That’s making it difficult for companies to effectively plan for the future.

Here's what you need to know about the labour market to help you forecast your sales, manage your costs and understand the salary outlook for 2026.

Jobs market gears down

Canada is facing an economic slowdown that’s being driven by tariff pressures and trade uncertainties. Uncertainty has prompted many businesses to hold off on expansion plans, with repercussions for hiring and overall employment levels. Still, layoffs remain stable, so far, reflecting resilience in the labour market. 

However, after many months of gains, July marked a turning point in the labour market. There was a net loss of 40,800 jobs, mainly in full-time private sector positions. Job losses continued in August, when the economy shed another 65,500 jobs. 

The August decline was larger, but perhaps less alarming than the one in July. That’s because the losses were concentrated in part-time jobs (-60,000) and among the self-employed (-43,000). 

These losses don’t suggest an imminent crisis, but the situation is deteriorating. The unemployment rate rose rapidly over the year, to 7.1% in August. 

There were 3.2 unemployed people for every job vacancy in Canada in June, a ratio that has been rising in recent months. Although there are still sectors and regions where finding workers is difficult, this is much less of an issue for business owners than it has been in recent years. 

The pool of potential workers is growing rapidly and, as a result, the number of vacancies is falling. While the number of unfilled positions remains significant in line with the pre-pandemic period, the openings are concentrated in a few sectors.

Statistics Canada counted 492,000 open positions nationwide in mid-2025. One in five was in the health and social services sector. And local service industries such as accommodation and food services, as well as retail trade, together accounted for another 20% of worker demand.  

Wage growth slows, productivity remains stagnant

According to Statistics Canada, total compensation for salaried employees edged up by 0.2% in the second quarter, the smallest increase since the second quarter of 2016, excluding the pandemic.

Weaker wage growth will be welcome for entrepreneurs, but it comes with other challenges in the current context. 

Uncertainty is pushing managers to slow the pace of hiring, which takes pressure off salaries. But the same dynamic is also causing them to delay investments that would improve the efficiency and productivity of their businesses.

Despite some recovery in productivity in 2024 (+0.6% after three years of decline), labour costs have soared. Over the past 10 years, corporate productivity has risen by just 3.2%, while unit labour costs (how much labour it costs to manufacture a single unit) have jumped 32%.

To remain competitive, businesses know they need to tightly control salaries. However, pay is also a key lever for attracting, motivating and retaining talent, especially in a market undergoing realignment.

What to do in 2026?

A slowing economy is causing compensation growth to trend lower. Employers are offering smaller pay increases in preparation for a possible recession and in reaction to the greater availability of workers. Canadian companies expect to increase their compensation budgets by 3.0% in 2026, a decline from recent years and a return to longer-term trend.

Workers in some business sectors can expect higher increases. For example, the IT and software sectors are expected to boost pay by 4.5 to 5%. But this pressure is coming mainly from new hires for highly specialized positions. 

Elsewhere, sectors exposed to the threat of tariffs will likely see wage grow slower. The impact of tariffs has already led many manufacturers to cut their salary budgets. The decline will continue for 2026 in this sector but should remain near the national average. 

The impact on your business

• A weakening job market could well lead to a slowdown in consumption. Revise your sales forecasts accordingly, if you haven't already done so.
• Although wage growth is slowing, unit labour costs remain high, without equivalent productivity gains. Companies must therefore adjust their talent management strategies to remain competitive in the current environment.
• Prioritize investments that improve long-term productivity. Rather than cutting staff across the board, identify those positions where targeted investment can generate sustainable efficiency gains. This may even involve improving your employees' skills.

Like the rest of the world, the Canadian economy is experiencing slower growth. GDP declined by a significant 1.6% annualized in the second quarter versus the first quarter, with almost the entire drop attributable to falling exports. 

By contrast, domestic demand—household and government consumption along with residential investment—actually improved. That held out the hope that robust domestic demand could cushion the negative effects of trade tensions with the U.S., but it’s not likely to last. This is because much of the domestic demand in the second quarter came from a build-up in business inventories.

Consumer spending rises while incomes weaken

Consumer spending rose at a rate of 1.1% in the quarter. Households, however, didn’t seem inclined to keep up their pace of purchases into the second half of the year. Retail sales fell between June and July, according to Statistics Canada's initial estimates. 

A strong labour market acts as an essential driver of consumer spending by supporting income growth and household confidence. That’s why weaker spending may be linked to a rapid weakening in the jobs market recently.

• Losses in July and August added up to 106,000 fewer jobs. The total decline in employment since February, when trade tensions intensified, stood at 38,500.
• After four consecutive months of steady growth, consumer confidence weakened in August, according to the Conference Board of Canada.

Recent data suggest that households will slow their pace of spending in the months ahead. 

Total compensation of salaried employees in the country rose by just 0.2% in Q2. This was the smallest increase since 2016 (excluding the pandemic year of 2020). Household disposable income rose by an equally anemic 0.3%, far less than spending growth. Households also chose to save more, but even here, the savings rate fell from 6% to 5% between the first and second quarters.

One factor that could encourage consumption in the coming months is lower interest rates. 

Mortgage and non-mortgage interest costs rose from April to June as the Bank of Canada held its key rate steady. The recent slowdown in the economy, a softening in the labour market and a healthy inflation picture could encourage the bank to lower its rate as early as September 17

Trade tensions keep pressure on exports and businesses

Exports picked up slightly in July, while imports slowed. As a result, Canada's merchandise trade deficit narrowed. In volume terms, exports rose by 1.6%, with increases recorded in almost a third of product sectors.

Although insufficient to offset the spring losses, exports for the year are still higher than the same period of 2024. It seems exports could be quietly stabilizing, as we observed no significant rebound or decline in the most recent data.

However, trade tensions are keeping up the pressure on Canadian business inventories.

Inventories rose rapidly in the first quarter following repeated announcements of new tariffs and growing uncertainty. The trend accelerated in the second quarter when inventories surged in all sectors covered by Statistics Canada. 

Indeed, inventories have grown faster than consumption, with the quarterly stock-to-sales ratio for the Canadian economy as a whole reaching 90.8% in the second quarter. 

We have to go back to Q2 of 2020, at the height of the pandemic, to find such a high level for this ratio. Back then, it hit 92.8% at a time when the entire economy was shut down.

The impact on your business

• The labour market weakened further in July, which could hurt consumer confidence and demand for your goods and services.
• Recent economic data may justify lower interest rates. A cut in the Bank of Canada’s key interest rate is a possibility for as early as September 17.
• Keep a close watch your inventories. A large part of recent domestic growth has come from the accumulation of inventories. This suggests businesses have been boosting production in anticipation of trade disruptions and increases the risk of a correction in coming quarters.

British Columbia faces new challenges in 2025 as uncertainty hit the economy and trade tensions remained unresolved. 

While less reliant on the U.S. than other provinces—53% of exports are shipped to the U.S. versus a national average of 77%—B.C. still felt the effects of U.S. tariffs in the first half of the year.

Growth in exports swung from +7% in the first quarter to -7.5% in the second, reflecting a surge in demand early in the year in anticipation of the imposition of tariffs. 

Looking ahead, the recent decision by the U.S. to double duties on Canadian softwood lumber will add downside pressure on exports in the coming quarters. 

However, energy exports to Asia, combined with the limited impact of tariffs and lower interest rates, should keep the province afloat this year. Fiscal measures aimed at helping industries targeted by tariffs and affected workers will also help limit the damage.

 We expect growth to remain below potential this year but still increase 1%. 

Resilient employment in the first half but will it last? 

In the first half, the economy generated decent employment and wage gains thanks to strong consumer spending. Despite high levels of uncertainty, retail sales increased by 2.9% in the second quarter, reflecting an uptick in confidence among British Columbians during the period. 

However, a drop in employment in June and July signalled an easing in the labour market. In response, consumers could turn more cautious in the coming months. 

Already in the first half, households were holding back from making big purchases. Home sales decreased by 12% and 7% in the first and second quarters, respectively. Some signs of life appeared in the real estate market in June and July when sales increased by 6% and 4%, respectively. But housing market is not expected to rebound quickly. A more likely scenario is a slowly recovery as interest rates drop and confidence is restored.

The province faces headwinds, but major projects help

Trade tensions dampened business investment intentions, turned consumers cautious and put pressure on trade. However, solid fundementals and sustained strategic investments will help the province this year and beyond. 

Gas production is set to advance with new LNG capacity and greater access to Asian markets. The B.C. government’s efforts to accelerate major infrastructure projects and prioritize critical mineral production will also drive future investments. 

On the tourism side, the province should continue to attract more visitors from the U.S. and overseas who are seeking to take advantage of a lower loonie. 

Business investment intentions among small and medium-sized businesses are also increasing, pointing to higher confidence in the economic outlook and improved prospects for the province. As trade uncertainty subsides and lower interest rates take full effect, we expect consumption to increase and drive growth. 

The impact on your business

• Uncertainty makes it difficult for businesses to forecast demand and proceed with plans.  Building resilience in your business is key in this environment
• Tariffs can have a significant impact on your business, depending on your industry. We offer tools to help your company weather the storm. https://www.bdc.ca/en/special-support/tariffs.
• It is important to assess your financial situation and position yourself favourably when requesting financing.