October 10, 2008 / 1:49 PM / in 9 years

Canadian job growth stuns; government to aid banks

TORONTO (Reuters) - The Canadian economy created more than 10 times the number of jobs expected in September, figures released on Friday showed, while the government unveiled a plan to buy insured mortgages to help cushion banks from the global financial crisis.

The headline number on the jobs report, followed by a solid trade surplus figure, seemed to defy concerns that global forces could sweep up Canada’s relatively healthy banking system and push its economy into a sharp downturn.

That could give a boost to Canada’s governing Conservatives, who are looking to secure at least a minority government in next Tuesday’s federal election.

“The jobs number is telling you the economy was in OK shape before the proverbial you-know-what hit the fan. Now, looking forward, the crisis is in full swing, it’s spreading across the Canadian border,” said Michael Gregory, senior economist at BMO Capital Markets.

“To ensure that we don’t run into any difficulties like they have in the U.K. or the U.S. or in Europe, in Russia or anywhere, the government is taking preemptive steps here to ensure that liquidity and funding costs remain reasonable and that the Canadian economy doesn’t accelerate too quickly.”

Statistics Canada said the economy added 107,000 jobs last month, which humbled estimates for a gain of 9,000 jobs and easily beat August’s gain of 15,200 jobs.

And even though the number was the biggest monthly gain since Statscan started collecting similar data in 1976, it did little to alter expectations for more Bank of Canada rate cuts since the bulk of the increase came from part-time employment.

Some economists said the report may be considered “old news” since it was compiled in the middle of September, just as the financial turmoil began to gather momentum.

“At the moment, it’s suggesting continuing strength in labor markets,” said Paul Ferley, assistant chief economist at Royal Bank of Canada. “However, given the weakness in the U.S. economy, given indications that the credit tightening is playing out here in Canada, commodity prices moving lower, I don’t think this kind of strength can continue.”

Most of the increase was in part-time employment, but even the rise of 10,000 in full-time jobs exceeded the increase in total employment foreseen in a Reuters survey of analysts. The unemployment rate held steady at 6.1 percent, as expected.

The Canadian dollar rallied briefly on the news but soon resumed its fall to 17-month lows. The Toronto Stock Exchange’s main index plunged more than 500 points at the open as global recession fears deepened. It later regained some ground but remained sharply lower.

MORTGAGE SYSTEM SOUND

The Conservative government has faced criticism in recent days that it failed to act to prevent credit-crisis contagion from damaging Canada.

Conservative Party officials continued to say Canadian banks and households are in good shape, affected, but not paralyzed, by the crisis that has swallowed homes and banks in the United States and elsewhere.

After the jobs data was released, Canadian Finance Minister Jim Flaherty said Canada Mortgage and Housing Corp, the agency that buys mortgages from financial institutions and resells the loans as securities with the backing of the government, planned to buy up to C$25 billion in insured mortgages.

Flaherty said Canada’s mortgage system is sound and the program is not a bank bailout as the government is not buying equity. According to Flaherty, the disruption of global credit markets has made it difficult for financial institutions in Canada to raise long-term funding.

DATA DEFIES

Canada’s trade surplus defied expectations as a report on Friday showed it rose to C$5.8 billion in August from C$4.2 billion in July. Analysts had forecast a surplus of C$4.5 billion.

Other data showed the price of new homes in Canada were on average unchanged in August from July.

Economists called the Canadian jobs report “dumbfounding”, “resoundingly positive” and “impressive”. But none were ready to alter expectations for additional Bank of Canada interest rate cuts after its surprise half-point cut this week in a coordinated move with other central banks to combat sharply tightening credit markets.

“I think it does suggest, at least in the very short term, resilience in the Canadian economy, certainly on the jobs side of the picture,” said Derek Holt, an economist at Scotia Capital. “But it’s only one reading.”

($1=$1.17 Canadian)

Additional reporting by Randall Palmer and Jennifer Kwan; Editing by Peter Galloway

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