Report: Downturn in Canadian manufacturing continues in October

Canadian manufacturing continued in contraction territory this October. The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) remained below the crucial 50.0 no-change mark in October for a sixth successive month. With the PMI rising to 48.6, from 47.5 and a three-month high, the rate of contraction was weaker than the previous months.

The monthly S&P Global report shares that output and orders both fell, while companies continued to engage in reduced purchasing and destocking. Job cuts were sustained, although at a negligible pace. Input price inflation increased and concerns that high prices will persist combined with the possibility of recession meant confidence in the outlook slipped to its lowest level for nearly three-and-a-half years.

Commenting on the latest survey results, Paul Smith, Economics director at S&P Global Market Intelligence said, “It was another disappointing month for the Canadian manufacturing sector, with output and new orders continuing to fall amid reports of underwhelming market demand. Sales to both domestic and international customers were again lower, and firms remain engaged in a cycle of destocking, seeking to cut any excess inventory that built up during the pandemic.”

The report states that the relative improvement in the headline PMI reflected softer contractions in both output and new orders. However, production continued to fall at a marked pace, reflective of not just an absence of new work but also a lack of skilled staff and delays in the delivery of inputs. Firms commented on challenges in recruiting suitable workers. This was a factor behind another drop in staffing volumes during October. Similarly, product shortages and delays in transport were reported by firms to have led to the greatest lengthening in average lead times for eight months.

Market conditions also reportedly worsened in October. This was the primary factor behind the eighth successive monthly fall in new work. Global demand for goods was generally lower, according to panellists. Consequently, new export orders also declined for a second month running. Firms continued to cut their buying activity markedly, instead preferring to utilize existing stocks in production wherever possible. Overall, inventories of inputs declined for the fifteenth successive month and at an elevated pace.

On the price front, October’s survey revealed a noticeable jump in cost inflation. Overall, input prices rose to the steepest degree since April. There were reports that an increase in the price of fuel was the principal contributing factor behind higher input costs. That said, firms also noted that suppliers were again willing to raise their charges despite weaker demand for their goods. Manufacturers responded by passing on a proportion of their increased costs to clients through higher charges. Output price inflation was solid overall, and a little firmer than September’s three-month low.

Finally, manufacturers remained confident on average that output will rise over the coming 12 months. However, optimism was down noticeably compared to September, sinking to its lowest level since May 2020. There are worries that high inflation and elevated interest rates will push economies into recession, leading to a further contraction of new orders and production.

“Perhaps most worrying is the pickup in input price inflation since September, which added to pressure on firms at a time of dwindling demand. Such pipeline pressures only reinforce the potential for interest rates to remain higher for longer, and companies seem aware of this, noting in their survey responses the potential for these factors to lead to an economic recession over the next year,” noted Smith.