Employment growth has been an undeniable bright spot on the Canadian economic landscape of late. Country wide, trend employment has vaulted ~360,000 higher in the past year alone. The corresponding employment growth rate, at a sturdy 2%, is nearly double the rate of increase in Canada’s working age population… triggering a nice step down in the national jobless rate.
Time and again, my Economics colleagues have highlighted the outsized contribution to job creation from Canada’s three largest cities: Toronto, Montréal and Vancouver (Chart 1). They have jointly accounted for >60% of Canadian job creation during the past two years, far exceeding their population weight (less than 30% today).
Suffice it to say, our three largest urban areas have become veritable lands of opportunity, and a virtuous cycle of job creation, income gains and population growth lends support to regional housing markets as higher borrowing rates and macro-prudential rules bind. As but a single example of the latter, OSFI confirmed on Tuesday that stress-testing of uninsured mortgages will be a reality come January 1st . (Insured mortgages are already stress tested.)
Notwithstanding the relative importance of Toronto, Montréal and Vancouver, there are other notable census metropolitan areas (or CMAs) scattered across the land. The monthly Labour Force Survey provides dates on no less than 34 CMAs—a number of which directly or indirectly, individually or jointly tap the bond market. In the interest of shining the metropolitan light more broadly, we’ve included here a few charts and brief commentary focused on labour market conditions and growth expectations in muni land.
As a few charts make clear, there’s been pain and suffering in some jurisdictions closely tied to oil; just look at the unemployment rate leader board. But we’re moving past the worst and back to positive job and GDP growth in certain oil-levered cities. While Québec, Ontario and BC labour markets are generally healthy, intra-province performance can be quite varied. Employment has surged in Montréal, while Québec City boasts the lowest jobless rate in the country (a scant 4% over the past three months). But Québec CMAs generally reside at the lower end of the spectrum when it comes to population growth.
Nonetheless, outside of Saguenay, you won’t find a large Canadian CMA where the working age population is in decline. And if you care to take an international perspective, demographics (e.g., population growth keyed by liberal immigration policy) are a decided advantage for Canada. In Ontario, Hamilton has fairly blown the doors off when it comes to employment growth, with its jobless rate moving sharply lower. Job growth has been harder to come by in parts of southwestern Ontario—a region no doubt eying the NAFTA squabble nervously. Count the Tri-City region of Kitchener-Cambridge-Waterloo as one area of SW Ontario that’s fared well… solid job creation, low unemployment and projected GDP growth at the upper end of the spectrum. (Chart 8 shows the Conference Board of Canada’s real GDP growth forecasts.) As for BC’s four main CMAs, they possess varying degrees of strength. In all cases, job growth is above average, unemployment rates are below average (and falling), populations are growing nicely, and solid real GDP gains are anticipated.
To be fair, underlying economic conditions (e.g., jobs and growth) hold less immediate sway over municipal finances than at more senior levels of government, owing to differences in the composition of revenue, the mill rate-setting process in our property tax system, provincial stipulations around balanced operating budgets at the local government level, etc.
Nonetheless, economic fundamentals factor into municipal credit ratings, carrying a 20% direct weight at both S&P and Moody’s (or closer to 30% when you consider the additional link to budgetary performance). Thus, metropolitan economic developments bear watching, particularly should Canada’s grand infrastructure plans eventually translate into net new muni bond supply. A strong underlying economy has become something of a hallmark feature for most (if not all) of Canada’s large municipal bond issuers and, to us, is an undeniable fundamental credit strength.