Could Canada reach full employment in 2026?

CIBC Capital Markets says Canada is unlikely to “run out of room” for non-inflationary growth before year-end, pushing back against market pricing that still implies a possible rate hike in 2026. In a Jan. 15 Economic Insights report, economists Andrew Grantham and colleagues argue that broader measures of labour market slack suggest materially more capacity remains, even after the recent rebound in the unemployment rate.

The jobless rate now sits roughly one percentage point above pre-pandemic levels, and CIBC sees little evidence that slack is being absorbed quickly enough to warrant tighter monetary policy. The firm disputes the idea that Canada could reach full employment this year without either an implausibly sharp acceleration in job growth or a contraction in the labour force, neither of which it views as a realistic base case. Under CIBC’s assumptions, eliminating slack before year-end would require job growth running at roughly double the pace seen in 2025, or sustained declines in labour force participation.

CIBC also argues that the non-accelerating inflation rate of unemployment (NAIRU), which likely rose in the post-pandemic period, appears to be drifting back toward pre-pandemic norms near or below 6%. The relationship between job vacancies and unemployment has begun to normalize, pointing to improved job matching rather than overheating demand. Importantly, the recent decline in unemployment has not been accompanied by rising job vacancies, reinforcing the view that structural frictions are easing.

One notable development is the declining contribution of newcomers to the overall unemployment rate. While the non-permanent resident population continues to grow within Labour Force Survey data, unemployment within that cohort has started to fall, suggesting better integration rather than simple population effects. CIBC also highlights scope for further recovery in labour force participation among younger workers, which could help fill vacancies without generating wage pressure.

From an inflation standpoint, compensation data remain supportive of a benign outlook. Business-sector wage growth and unit labour costs have eased to levels consistent with continued progress toward the 2% inflation target. CIBC expects wage growth to remain modest, particularly if job gains increasingly draw from those currently outside the labour force rather than tightening conditions for already-employed workers.

Putting these dynamics together, CIBC forecasts an extended period of labour market slack through 2026, with the unemployment rate gradually declining rather than snapping back to full employment. As a result, the firm expects the Bank of Canada to remain on hold this year, with only modest restraint potentially required closer to mid-2027 if growth accelerates as expected later in the forecast horizon.

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