Report: Canadian manufacturing growth softens in January as input costs rise

Canada’s manufacturing sector saw improvement in overall operating conditions in January, according to IHS Markit Canada’s latest Manufacturing PMI (Purchasing Managers’ Index) report.

Growth moderated from that seen in December, however, as restrictions linked to the coronavirus pandemic 2019 (COVID-19) persisted.

“Latest data signalled another month of expansion in the Canadian manufacturing sector with a solid uptick registered in January,” says Shreeya Patel, economist at IHS Markit, in a statement. “Both output and new order volumes rose for a seventh successive month and firms continued to increase their purchasing activity.

“That said, signs of fragility emerged as all five of the PMI components moderated at the start of the year. Ongoing restrictions and border closures continue to pose a threat to exports and factory operations. At the same time, higher material prices and transportation costs added to the rate of input price inflation.

“Until vaccines are widely administered the sector can expect to see measures extend in pursuance of controlling case numbers.”

Nevertheless, firms remained optimistic that output in the year ahead will improve, although the longer-term impact of COVID-19 weighed slightly on the degree of optimism.

Growth period ‘softening’

On the price front, sharp cost pressures continued to mount with higher raw material costs often mentioned as the main driver of inflation. Panellists reported to pass on cost burdens in efforts to protect profit margins.

The headline seasonally adjusted IHS Markit Canada Manufacturing PMI registered 54.4 in January, down sharply from 57.9 in December. Despite moderating, the latest reading signalled a solid expansion in business conditions in the Canadian goods-producing sector.

Production volumes increased solidly in January, extending the current run of growth to seven-months. The uptick eased to softest in the aforementioned sequence, however, as ongoing restrictions had reportedly weighed on new order inflows.

Similarly, new orders rose at the start of the year, although the rate of expansion softened to a six-month low. Firms partly linked growth to greater demand for virus-related products such as personal protection equipment (PPE). That said, exports were broadly unchanged as tighter restrictions in external markets led to subdued foreign demand.

Softer increases in workloads led to a slower round of job creation. Some firms mentioned cost saving pressures had prompted restructuring efforts at the start of 2021.

Vendor challenges

Manufacturing firms continued to boost their purchasing activity with input buying increasing modestly. However, border restrictions and port congestion contributed to deteriorating vendor performance, which was among the sharpest in the series history. At the same time, panellists linked rising backlogs to delays in the receipt of inputs.

Uncertain demand conditions, a moderation in optimism and efforts to better control cash flows led to decreases in stocked inputs and post-production inventories at the end of the year.

Input cost inflation meanwhile remained robust with manufacturers reporting higher prices for aluminium, steel and transportation.

Surcharges for metals contributed to another sharp increase in selling prices.