OTTAWA (Reuters) - Canada's economy created far more jobs than expected in December, defying economic growth that remained sluggish and bolstering the likelihood of a central bank interest rate hike later this year.
The economy added 39,800 jobs in December from November, Statistics Canada said on Friday, well above market expectations for 5,000 jobs and surpassing even the most bullish prediction in a Reuters poll of analysts.
The unemployment rate dipped to a four-year low of 7.1 percent from 7.2 percent in November.
It was the third surprisingly strong jobs report over the past four months that seemed at odds with other evidence of an economic slowdown.
Employers were expected to have shied away from hiring in December, ahead of a recent deal by U.S. lawmakers and the White House to avert potentially crippling austerity measures that had been due to take effect early this year.
"My initial response is not only are they defying expectations, they are defying gravity," said Doug Porter, deputy chief economist at BMO Capital Markets of the jobs numbers.
Canada has long recovered all the jobs lost during the 2008-09 recession but hiring has been unsteady as businesses fret about headwinds from the U.S. and Europe.
The Bank of Canada does not formally target employment and inflation has been below its 2 percent target, but the strength of the labor market suggests a stronger kick off to 2013 than other economic indicators have suggested so far.
"I don't think the bank will be in any rush to do anything. But it likely means they'll keep a mild hawkish bias in place," said Porter.
Central bank chief Mark Carney has kept rates on hold at 1.0 percent since September 2010 but has insisted for the past several months that his next move will be up, not down.
Most primary securities dealers surveyed by Reuters expect a move in the fourth quarter of this year.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders increased bets on a rate hike in late 2013 after the employment report.
The Canadian dollar rallied after the data and at 10:30 a.m. (1530 GMT) was trading at $0.9853 to the U.S. dollar, or $1.0149, compared with C$0.9880, or $1.0121, at Thursday's North American close.
Another Statscan report on Friday showed producer prices fell 0.3 percent in November from October as gasoline and other fuel prices fell. Raw materials prices slid 1.9 percent. Both indices were down from a year earlier.
Puzzled by the resilient job numbers in Canada in the face of sub-par growth, economists took their cue from lackluster U.S. jobs data on Friday and predicted the trend would not continue.
According to Statscan, the economy churned out 59,300 jobs in November - the equivalent of 534,000 in the United States - and outsized gains in September and August while October saw a lull.
"As good as these numbers were, and have been over the last couple of months, there is still a sense that the levitation act on jobs can't continue for much longer," said Mark Chandler, head of fixed income and currency strategy at Royal Bank of Canada.
"There's still some doubt cast around these numbers even though they look solid in all the details," he said.
Statscan's household survey tends to be volatile from month to month, so analysts prefer to look at the six-month trend, which showed average job gains of about 26,000.
In 2012 as a whole, employment grew by roughly the same amount as in 2010, by 1.8 percent, or 312,000 jobs. That was up from 1.1 percent growth in 2011 but weaker than the pace of growth in the pre-recession years of 2006 and 2007.
Most of the details in the December report were positive. All the gains were in full-time jobs and most were in the private sector.
Employment gains were spread across goods-producing and services sectors, with the strongest hiring in transportation and warehousing, construction and health care and social assistance.
"It is very tough to reconcile this with a lot of the other indicators we are seeing on the economy, but we have to accept the numbers as presented. Almost every aspect of this report was strong," said Porter.
Additional reporting by Alex Paterson in Ottawa and Andrea Hopkins, Julie Gordon and Alastair Sharp in Toronto; Editing by Bernadette Baum