Report: Modest improvement signs in Canadian manufacturing in January 2023

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) recorded 51 in January. This was up from 49.2 at the end of 2022. The latest data marked the first time that the index has recorded above the 50 no-change mark that separates growth from contraction since last July.

According to the latest S&P Global report, Canada’s manufacturing economy showed modest growth during January, underpinned by gains in both production and new orders. The industry saw the addition of jobs. Inputs goods and labour availability was stabilizing after a period of shortages. Inflationary pressures also continued to soften over the month, although worries over recession persist. Confidence about the future remained positive but slipped to a three-month low at the start of 2023.

Commenting on the latest survey results, Paul Smith, economics director at S&P Global Market Intelligence said, “The Canadian manufacturing economy began 2023 on a firmer footing than at the end of last year, registering some welcome, albeit modest, growth in both output and new orders. Anecdotal evidence also pointed to some stabilization in input and staff supply. The emerging dissipation of these factors are heartening given the way they have hobbled manufacturing sector performance at various points since the start of the pandemic.”

Both manufacturing output and new orders saw concurrent increases during the month. Companies reported that market demand was improving. The marginal increase in sales seen at the start of the year encouraged firms to raise their output. However, any growth primarily emanated from the domestic market as new export orders fell for an eighth month in a row. Underlying global demand remained soft, according to panellists.

Firms felt suitably encouraged to hire additional workers. Employment growth was modest, but nonetheless the best recorded by the survey since last July. Evidence shows that the sector added jobs to bolster productive capabilities. Survey respondents shared positive projections for growth in the months ahead, indicating confidence about the future. Firms are hoping that market demand and input supply will continue to stabilize over the months ahead. Although average lead times for the delivery of inputs lengthened again in January, amid residual supply challenges in shipping freight services and border delays, several firms commented that vendors were finally getting on top of the backlog difficulties that have been so prominent since the start of the pandemic.

Nonetheless, expectations for output in the year ahead did slip a little in January, falling to a three-month low.

“Also welcome is the reduction in inflationary pressures and gives additional hope of firmer sector recovery in the months ahead. However, we must remember that growth is modest, and fears of the negative impacts on output of recession persist. For these reasons, confidence overall remains below par and firms retain a cautionary approach to their purchasing activities,” said Smith.

Firms noted a preference to lean on existing inventories wherever possible. This meant that stocks of inputs fell again at the start of 2023. Lower purchasing activity also helped to relieve supply pressure on vendors and ensured that input price inflation resumed the steady downward trend seen throughout much of 2022. Overall, input prices rose markedly – reflective of some persistent, and somewhat systematic, price inflation – but at their lowest pace for nearly two-and-a-half years. Output charges also increased at one of the slowest rates in the past two years during January.