Report: Manufacturing production continues to show strong growth in April

The latest S&P Global Canada Manufacturing’s Purchasing Managers’ Index (PMI) shows strong expansion in operating conditions in the Canadian manufacturing sector. This is despite a slight moderation since March.

Easing COVID-19 restrictions and a general improvement in demand conditions led to strong inflows of new work. This caused a sharp increase in output and purchases. Strong capacity pressures continued to emerge leading firms responded to raise their staffing levels at a quicker pace.

The seasonally adjusted S&P Global Canada Manufacturing PMI registered at 56.2 in April. This was down from March’s survey-record high of 58.9. This reading indicates continued strong operating conditions. It extends the current period of growth to 22- months, but dipped to a joint 14-month low.

Shreeya Patel, Economist at S&P Global, commented, “The start of the second quarter of 2022 yielded another favourable month of trading for Canadian manufacturers. Demand conditions were supportive and continued to underpin a solid improvement in operating conditions. As has been the case over the last year or so, consumer demand remains strong despite elevated rates of inflation.”

Firms continued to face steep cost pressures with higher charges for transportation, material and fuel reported. Geopolitical tensions were also blamed for elevated rates of inflation.

There was a solid uptick in new orders. Firms mentioned securing new clients in the domestic market. Sales to international clients also increased with exports rising for the second successive month.

Firms raised their production levels at the start of the quarter due to the continued strong demand conditions. Output rose sharply, though at a softer pace than that seen in March. Consumer goods firms raised their output levels at the strongest rate followed by those in the investment and intermediate goods sectors, respectively.

Vendor performance deteriorated greatly during the month, although to the joint-weakest degree since November 2020. There were widespread reports of material scarcity, truck shortages and freight delays. Consequently, backlogs rose sharply. Firms did, however, seek to tame the rise in incomplete work by adding to headcounts, though this was not enough to curb an increase in outstanding business. Firms also mentioned that there were still shortages of skilled labour. Subsequently, firms had little capacity to raise post-production inventories, which fell slightly in April.

Raw material scarcity and lengthy lead times prompted Canadian manufacturing firms to raise their pre-production inventories. Stockpiling has now been seen in each of the last 15 months. Purchasing activity, meanwhile, rose substantially, and at the third-strongest rate in the series history.

Input price inflation moderated from March’s peak. The rate of increase was still substantial, however, and among the quickest in the series history. A number of reasons were cited for higher input costs including rising fuel, material, transportation and labour expenses. The war in Ukraine also reportedly drove up input costs.

“Capacity constraints have persisted and firms look to be struggling with labour shortages. Recent geopolitical developments have also exacerbated costs, particularly for fuel and raw materials. At the same time, anecdotal evidence often mentioned shortages of trucks which could further impact production in the future,” said Patel.

Selling prices rose sharply. In fact, the rate of inflation was the second-strongest in the series’ history surpassed only by that seen in March. Firms reported efforts to protect profit margins and pass on higher transportation and material costs.

Looking ahead, favourable demand conditions supported positive sentiment at the start of the second quarter. However, the degree of optimism moderated from March and dipped just below the long-run series average. Steep cost pressures, the geopolitical environment and uncertainty weighed slightly on hopes during April.

“Canada’s manufacturing sector has performed strongly despite supply bottlenecks, COVID-19 and increasing uncertainty. Firms remain prepared and continue to foresee output growth over the coming months,” added Patel.