Report: Canadian manufacturing shows record improvement in March

S&P Global Canada Manufacturing’s Purchasing Managers’ Index (PMI) registered at 58.9 in March, up from 56.6 in February. It is the highest reading in the survey’s eleven-and-a-half-year history.

The first quarter of the year concluded with a survey-record improvement in overall business conditions for Canadian manufacturers with easing COVID-19 related restrictions and improving demand. Output and new order growth increased at a high rate. Concerns over input shortages and delivery delays prompted a record uplift in pre-production inventories.

Strong capacity pressures allowed firms to raise their headcounts. Favourable demand conditions kept firms optimistic about output growth in 12 months’ time.

Shreeya Patel, Economist at S&P Global, said, “Canada’s manufacturing sector again enjoyed a bustling month of trading in March to conclude the first quarter of 2022 with a record improvement in business conditions. Key to growth were robust uplifts in output, new orders and purchases. Staffing levels meanwhile continued to expand while further signs of capacity pressures will ensure workers are kept busy over the spring and summer months.”

However, cost pressures remained high, with increasing fuel, input and transportation costs. Consequently, this led to a survey-record increase in input price inflation. Output charges followed a similar trend, also rising at the quickest rate in the series’ history.

Demand increased at the quickest pace since March 2021. According to panel comments, higher sales stemmed from the relaxation of pandemic restrictions as well as client concerns over future price hikes and shortages. Manufacturers lifted production levels in March at the strongest rate in exactly a year. Firms also reported that greater demand and larger workforces contributed to the increase.

Vendor performance deteriorated markedly in March, lengthening at the third-greatest degree in the survey’s history. In efforts to meet existing orders, firms raised their purchasing activity at the second-quickest rate on record. Pre-production inventories meanwhile were up at the quickest rate in the series history. Manufacturers noted that concerns over higher prices prompted advanced ordering.

“Though, while data continues to look positive at first glance, severe concerns are apparent upon deeper inspection. A common theme in the latest survey were further expectations of material scarcity, delivery delays and future price hikes. Another severe lengthening of delivery times supported concerns, which is likely to persist even though global pandemic restrictions are expected to ease further,” noted Patel.

Due to higher demand for Canadian goods during the month, firms increased their workforce, a trend that has persisted over the last 21 months. However, the rate of growth was not sufficient to address the rise in backlogs, extending existing concerns over capacity pressures. Manufacturing firms continued to sell from inventories, which fell for the twelfth month running.

News of the Russia-Ukraine war hiked up costs in March. Input shortages and price hikes for fuel, transportation and metals were reportedly the main drivers of inflation. The rate of increase quickened to a series high, surpassing last September’s previous peak.

Similarly, output price inflation rose at a survey-record rate during the month. The relatively strong demand environment allowed firms to pass on a large part of the cost burden, however.

Looking ahead, firms were upbeat about their growth prospects in the year ahead. Sentiment improved over the month, especially due to the relaxation of pandemic restrictions and further hopes of a return to normality.

“Consumers stocked up on inputs despite intense cost pressures. In fact, the latest data revealed survey-record increases in output and input price inflation. With demand showing no signs of letting up and the knock-on effects of the war in Ukraine, we can expect to see prices rising at elevated rates for at least the duration of the year,” added Patel.