Report: Canadian manufacturing growth contracts in March

The Canadian manufacturing sector contracted in March as a result of the concurrent decline in both production and new orders. The S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) registered 48.6. This was a noticeable drop from 52.4 in February.

According to S&P Global, the PMI in March was the lowest reading recorded by the index since June 2020 and represented a modest deterioration in operating conditions. Higher prices remained a challenge during this period. There was a sharp increase in costs. Supply-side shortages were generally reported to be less widespread and inflation trends remained downward. Firms also hired additional workers as confidence in the future of the Canadian manufacturing sector improved.

There were concurrent falls in both output and new orders during March, the first contractions of the year so far. The rate of decline in production was modest, with firms signalling the fall was closely linked to the steepest contraction of new orders since last October. Panellists noted that product markets were characterized by uncertainty and that purchasing power had been eroded by elevated inflation. These factors were common for both domestic and external clients: new export orders fell in March for a tenth successive month and to the sharpest degree since December.

Manufacturers also continued to report steeply rising prices. Input costs rose at a strong overall pace, with a wide range of goods and inputs again up in price since the previous month. However, the rate of inflation maintained the gentle downward trend evident since the turn of the year, dropping to its lowest since July 2020 and remaining below the long-run survey average. Companies signalled that this in part reflected a relative improvement in supply-side goods availability: although vendor performance was reported to have worsened again, average lead times lengthened only slightly and to the weakest degree since October 2019. There was evidence of fewer delays in shipping, with container availability said to have improved.

Slower overall input price inflation fed through to a similarly weaker gain in output charges, with manufacturers increasing their own prices to the slowest degree since October 2020. There were some reports that promotional discounts were required to entice buyers given a competitive marketplace and worsening sales in March. Softer demand also discouraged buying activity in the Canadian manufacturing sector, as manufacturers showed a preference for using existing stocks at their plants.

Nonetheless, firms are expecting a pick-up in production over the coming 12 months amid hopes of economic recovery and a more stable demand environment. These factors should support sales and output, with firms suitably buoyed to take on additional staff for a fifth successive month. A combination of higher staffing levels, better productivity and relatively fewer component shortages meant firms were able to clear backlogs of work at their plants to the greatest degree for four months. They were also able to add to their inventories of finished goods slightly for the second time in 2023 so far.

“Broader macroeconomic uncertainty and the negative impact of rising prices on client purchasing power were key factors that weighed on market demand. Nonetheless, despite these setbacks, there were some positive news to take from the survey, namely that price pressures continued to fall over the month amid reports of better supply-side stability. These are welcome developments given their roles in constraining manufacturing sector performance since the onset of the pandemic in 2020. And despite some residual challenges persisting – cost inflation remains high for instance – firms are growing in confidence, with optimism rising to its strongest in nearly a year and hiring activity being sustained, ” said Paul Smith, Economics Director at S&P Global Market Intelligence, commenting on the general health of Canadian manufacturing in March.