Unexpected job losses pushed Canada's unemployment rate higher in October as the European debt crisis and U.S. weakness buffeted the exporting nation's economy and weakened confidence.
The prospect of an eventual interest-rate cut by the Bank of Canada looked more plausible after the economy lost 54,000 jobs in last month, eroding most of the prior month's gains and pushing the unemployment rate up to 7.3 percent from 7.1 percent.
Other data also suggested markedly slower growth toward the end of the year, showing a third consecutive decline in building permits in September and a slower pace of purchasing activity in October.
It looks like global economic fears and Europe's debt crisis are taking a toll on Canadian business confidence and hiring intentions, said Sal Guatieri, senior economist at BMO Capital Markets.
Breaking with a recent trend, Canada's job report was more downbeat than October's employment figures in the United States. Data on Friday showed U.S. employment rose less than expected in the month, but a drop in the jobless rate to a six-month low and upward revisions to previous months' gains pointed to some improvement.
Guatieri and other economists are now openly talking about the possibility the central bank will begin reversing some of the rate hikes implemented last year, if the European problems continue to lap up on Canadian shores.
Clearly, it will discourage the Bank of Canada from raising interest rates for quite some time. If economic conditions deteriorate, it's possible the bank would cut interest rates. For the moment, though, we expect steady policy.
Last month, the bank extended a yearlong freeze on its benchmark interest rate, now at just 1 percent.
None of 12 primary dealers in Canada predicted a rate cut, according to a Reuters poll on Friday after the Statscan release, but they did push back their expectations for the timing of the next rate hike. Seven of 12 dealers predicted the bank would resume hiking sometime from mid-2012 to late 2012, while the other five see a hike in 2013.
Markets are even more dovish, pricing in an increased chance of monetary easing next year.
The Canadian dollar weakened by nearly a cent to as low as C$1.0170 to the U.S. dollar, or 98.33 U.S. cents, after the jobs data. It later regained some ground.
With Canada at risk of losing its status as the strongest economy among the Group of 7 industrialized nations, both Prime Minister Stephen Harper and Finance Minister Jim Flaherty blamed the job woes on Europe.
It's been more volatile and slower than we would like, and it's a reflection of a lack of confidence that's been spreading in world markets as a consequence of the European debt crisis, Harper told reporters in Cannes, France, after a Group of 20 summit to try to prevent contagion from Greece.
Ottawa does not expect a recession in Canada, but Flaherty warned, We're an open trading country, and we get buffeted when things become difficult elsewhere, as they are now in Europe.
The Conservative government is under pressure from opposition parties to prepare another round of stimulus. So far, Harper has replied only that he will be flexible.
Canada's labor market bounced back more quickly from the recession than U.S. employment did, and by January had recouped all the jobs lost during the downturn. But employment in some sectors such as manufacturing is still below the prerecession peak and is not expected to ever fully recover.
Statscan said total employment rose by 1.4 percent in the past year and full-time employment grew 1.6 percent.
Still, most of the details in the October report were negative, with the private sector shedding 32,000 jobs, and about 72,000 full-time positions vanishing in all. Part-time employment grew by a tepid 18,000.
Only the natural-resources sector of the economy saw significant job gains.
Another reason why the Bank of Canada has taken rate hikes off the radar screen is signs wage pressures are subsiding, with 1.3 percent annual wage growth in October, down from 1.6 percent in September.
Separately, Statscan reported that the value of building permits fell 4.9 percent in September, the third straight monthly decline.
The pace of purchasing activity in the Canadian economy fell in October to 54.4 from 55.7 on a seasonally adjusted basis.
(Additional reporting by Howaida Sorour, David Ljunggren, Andrea Hopkins, Claire Sibonney, Allison Martell; editing by Peter Galloway and Rob Wilson)