Report: Continued trouble in Canadian manufacturing sector in July

July was another slow month for Canadian manufacturers after a slow June. Overall business conditions improved at the weakest rate in over two years.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) registered at 52.5 in July, down from 54.6 in June. The latest reading signalled 25 continuous months of growth. However, the improvement was the weakest in this sequence.

The latest survey revealed renewed declines in output and new orders while employment growth softened. Export sales were a particular drag on the sector in July. New work from abroad fell to the greatest extent for 25 months.

On the price front, sharp cost pressures continued to mount with higher material, foodstuff and transportation costs often mentioned as the main drivers of inflation. Panellists reportedly passed on rising cost burdens as part of efforts to protect profit margins. That said, the rates of input cost and output price inflation eased to five-month lows in both cases.

The two largest components of the PMI by weight – output and new orders – were behind the latest moderation. Both fell in July and for the first time in just over two years.

Weak client demand combined with sharply rising prices resulted in a decline in output in July. This signalled the first contraction since the outbreak of the pandemic in March-June 2020. The rate of decline was marginal, however, with around 17 percent of firms recording a contraction while 14 percent registered an increase in production levels.

Commenting on the latest survey results, Shreeya Patel, Economist at S&P Global Market Intelligence said, “Latest PMI data revealed another slowdown in operating conditions in Canada’s manufacturing sector with the PMI at its lowest point for just over two years. Behind the latest moderation were contractions in both output and new orders which fell for the first time since the pandemic began in the first half of 2020.”

New orders fell moderately, which ended two years of new order growth. Sales to foreign markets meanwhile fell for the second month in a row, and at a quicker pace in July. Anecdotal evidence pointed to weaker demand from the American market.

Subdued demand conditions paired with weak input availability led to a slower increase in buying activity. In fact, purchases rose at the slowest pace for just over two years. Pre-production inventories rose at a quicker pace, however, with firms reporting lower output requirements resulted in a build-up of inventories.

“Firms continue to face sharply rising costs, which have been exacerbated by the war in Ukraine and lockdowns in China. Policymakers have reaffirmed their stance on tackling inflation by raising interest rates by a full percentage point last month,” said Patel.

Softer increases in workloads led to a slower round of job creation at the start of the third quarter. Employment levels rose at the weakest rate for a-year-and-a-half. According to panel comments, restructuring efforts led some firms to cut headcounts.

With demand conditions subdued, firms concentrated their efforts on building post-production inventories which increased for the first time in 16 months. Backlogs meanwhile rose slightly, and at the joint-weakest pace for two years.

Turning to prices, input price inflation eased to a five-month low in July but remained robust and much quicker than the long-run series average. Higher prices were attributed to the war in Ukraine and lockdowns in China. Rising fuel, transportation, labour and food costs were often mentioned by panellists.

Selling prices charged for Canadian manufactured goods also rose sharply in July, but at a softer pace to that seen in June. The rate of inflation was the weakest since February, and below the average seen for 2022 so far.

Finally, manufacturers in Canada remained optimistic about their output levels in the year ahead. Firms mentioned hopes of greater demand and successful new product launches. That said, sentiment was below the long-run average with recession concerns weighing slightly on hopes.

“Companies in Canada will hope price pressures continue to ease and demand from both international and domestic markets improves. In the meantime, firms remain cautiously optimistic about their 12-month outlook for output,” concluded Patel.