Report: Canadian manufacturing showed growth in January 2022 despite challenges

IHS Markit’s latest purchasing managers survey shows that Canada’s manufacturing sector has continued to grow at the start of 2022. Operating conditions improved sharply in January. There was an increase in output, new orders, purchases and employment, while sentiment improved.

However, the industry faced challenges such as delivery delays, port congestion and a nationwide rise in Omicron cases. Weak vendor performance resulted in poor input availability and weaker output growth. Supply chain disruptions and material shortages caused sharp price pressures.

Despite the challenges, input and output price inflation moderated in January.

The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers’ Index (PMI) registered at 56.2 in January, down slightly from 56.5 in December. This signalled a sharp overall expansion, albeit the joint-weakest for 11 months. Growth has been seen in each month since July 2020. Central to the moderation was a slowdown in output growth. Output rose at the softest pace for over a year-and-a-half amid weak input availability and increased disruption from COVID-19.

“Another robust improvement in operating conditions was recorded in Canada’s manufacturing sector with the PMI at 56.2 at the start of the year. The headline figure reflected favourable demand conditions, rising employment levels and growth in inventories. Additionally, price pressures showed further signs of easing, with rates of output and input price inflation moderating to ten- and 11-months lows, respectively,” said Shreeya Patel, Economist at IHS Markit.

While output growth was weaker, domestic demand for Canadian manufactured goods increased during the start of 2022. Despite the presence of virus-related restrictions, demand remained strong. Sales to international markets rose at a slower pace in January.

Increasing orders prompted Canadian firms to hire more people. The rate of growth was solid, and the joint-strongest since July 2021. However, Backlogs rose at one of the quickest rates in the survey’s 11-year history.

Weak input availability and poor vendor performance caused the sharp increase in backlogs. Tighter pandemic restrictions, port congestions, adverse weather conditions and truck shortages increased lead times in January and added to the delays. Vendor performance deteriorated at the fifth most marked rate in the series history.

Sustained periods of supply chain issues continued to encourage advance ordering strategies with stocks of inventories rising solidly. The rate of growth did, however, slow amid elevated costs and efforts to better control inventories. Meanwhile, stocks of finished goods depleted further with difficulties surrounding production often mentioned by panellists.

As for prices, rising raw material costs (lumber and metal) and higher transportation fares led to another sharp rate of input price inflation. The rate of increase slowed, however, and was the softest for 11 months. Higher cost burdens were passed on to clients in January, though here also the rate of inflation moderated from that seen in December.

Finally, the 12-month outlook for output improved amid hopes of a return to normality, greater material availability and strong client demand. That said, the degree of optimism was lower than the average seen for 2021, suggesting the Omicron variant weighed slightly on confidence.

“COVID-19 yet again hit performance with output growth slowing notably. Tighter restrictions, among other issues, led to weak input availability and poor transportation conditions. Nevertheless, there is a further indication that restrictions will start to ease across the provinces in the months ahead. Fortunately, Canada boasts a high vaccination rate, which has allowed for growth to continue in the manufacturing sector despite a resurgence in cases,” added Patel.