Report: Canadian manufacturing on a positive recovery track overall in February

IHS Markit’s Canada Manufacturing Purchasing Managers’ Index for the month of February registered at 56.6, up from 56.2 in the previous month. The latest result signalled the strongest uptick for three months and one that continued the run of growth which began July 2020.

The survey shows that an uplift in output and new orders resulted in better conditions for Canadian manufacturing during the month. There was a good increase in output, new orders and purchasing activity. Favourable demand conditions supported job creation. However, ongoing supply chain issues and material scarcity resulted in long lead times. Consequently, capacity pressures were high along with a sharp increase in backlogs.

“February data revealed another expansion in Canada’s manufacturing sector with the headline PMI improving during the month. Growth was underpinned by a quicker expansion in output, following sharp uplifts to headcounts and supportive domestic demand conditions,” said Shreeya Patel, Economist at IHS Markit.

“That said, supplier delivery times were marked once again, a common theme since the pandemic hit in March 2020. Material shortages, poor transportation conditions and price hikes have forced firms to plan in advance, but productivity has been somewhat hit.”

Sharp price pressures continued and input price inflation accelerated in February. Firms passed on part of the burden in an attempt to protect profit margins.

A key driver of the latest improvement was a quicker uplift in output. Survey respondents linked rising production volumes to higher unit orders, and greater employment. Similarly, new orders rose sharply in February amid new product launches and greater demand following a further relaxation of COVID-19 restrictions. Contrary to the trend for domestic sales, exports fell for the first time in over a year.

A solid uptick in production schedules was supported by additional staff recruitment across the manufacturing sector, which extended the current period of job creation to 20 successive months. Despite this, the latest data highlighted severe capacity pressures with backlogs rising sharply, albeit at the softest pace for eight months.

At the same time, vendor performance deteriorated in February amid poor transportation conditions, shipping delays and material shortages. Overall, delivery times lengthened markedly, and to the fifth-greatest extent in the survey’s 11-and-a-half-year history.

In line with higher workloads, firms increased their buying activity during the month, albeit at the softest pace for a year. Meanwhile, efforts to protect against future delivery delays and price shocks drove a marginal uplift in pre-production inventories. Stocks of finished goods fell solidly, however.

Intense cost pressures persisted with the rate of input price inflation robust in February. Higher raw material prices were overwhelmingly linked to the latest surge, though there were also reports of rising transportation, energy and fuel costs.

Subsequently, and in a bid to protect profits, charges levied by manufacturers in Canada rose sharply. The overall rate of inflation was robust, and among the steepest in the series history.

Looking ahead, firms remained widely upbeat about their output expectations for the next 12 months. Overall sentiment remained positive due to hopes of easing supply issues and the end of virus-related restrictions.

“For now, businesses in Canada are coping with external pressures, but issues surrounding rising costs and supply are likely to persist for the duration of the year. The picture for the pandemic continues to improve, however,” added Patel.