Report: Canadian manufacturing sector faces toughest month of 2024

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) registered at 47.8, down from 49.3 in June. Remaining below the crucial 50.0 no-change mark, it signalled the steepest worsening of operating conditions in 2024 to date.

July marked a challenging month for the Canadian manufacturing economy with the health of the sector deteriorating to the steepest degree since December. Output and new orders both fell at sharper rates amid reports of challenging market conditions. Supply chain delays were also noted, whilst firms reduced their purchasing activity and reported a fall in sentiment to its lowest level since May 2020. On the prices front, cost inflation remained solid but well below trend. Charges rose only marginally.

Undermining the PMI in July was a reduction in manufacturing production. It was the twelfth successive month in which a decline in output has been registered and the latest fall was the steepest since last December. The downturn was closely linked to a similar-sized deterioration in new orders. Panellists noted that market uncertainty – linked to inflation and geopolitical tensions – continued to undermine demand, both at home and abroad. Sales to foreign clients declined in July for the eleventh successive month and to the steepest degree since May 2020.

“The latest manufacturing data disappointed in July, with accelerated declines in both output and new orders both recorded as we enter the second half of 2024. Panellists were subsequently circumspect in their purchasing and input inventory management by adjusting these both downwards to reflect the weaker and uncertain operating environment,” said Paul Smith, Economics Director at S&P Global Market Intelligence.

Panellists responded to the weak trends in output and new orders by cutting back on their purchasing activity. Similarly, the decline in input buying was also the steepest of the year so far, with firms signalling a preference to utilize inventories rather than buy in new inputs. With this in mind, input stocks declined for the first time in three months. In contrast, an excess of production over current workloads led to a modest rise in inventories of finished goods.

Manufacturers were easily able to keep on top of their workloads, with outstanding business declining in tandem with the drop in new orders. The rate of contraction was again steep. Despite evidence of spare capacity, firms took on extra staff – albeit marginally – for the fifth time in the past six months. This was in part reflective of expectations for production growth in the year ahead. Confidence indeed remained positive overall, although worries about inflation and high interest rates meant sentiment dropped to its lowest level since May 2020.

Firms also noted supply-side constraints in July, with average lead times deteriorating to the greatest extent since February 2023. There were reports from panellists of delays with sea freight especially on key maritime routes including the Red Sea. Firms linked these constraints to higher input prices, which overall increased again in July to a solid degree. Vendor prices were generally higher, whilst an increase in the price of US-dollar-denominated imports was also noted. In response, manufacturers sought to raise their own charges to offset higher costs. However, the rate of charge inflation was again only marginal.

“Although employment growth was sustained, this was on the back of what looks like dwindling hopes for future output growth. Confidence about next year’s output may remain positive, but sentiment is at its lowest level since May 2020. It seems that the Bank of Canada’s recently announced second cut in interest rates could not have come soon enough as firms look to lower borrowing costs and reduced inflation to help reinvigorate demand in the coming months,” said Smith.