IHS Markit Dec 2021Click image to enlarge

The final month of 2021 revealed another robust expansion in operating conditions for Canada's manufacturing sector.

Increases in output, new orders and employment were sustained in December as well as the fastest uptick in pre-production inventories for over 11 years of data collection, according to the IHS Markit Canada Manufacturing Purchasing Managers’ Index.

"Canadian manufacturers closed 2021 with a robust expansion in operating conditions as the sector continues to reap the benefits of strong domestic and international demand. Moreover, anticipation of greater customer orders encouraged firms to stockpile at record rates during December,” said Shreeya Patel, Economist at IHS Markit.

There were, however, further signs that material shortages and delivery delays were constraining the sector with output growth softening and backlogs rising markedly. In addition, firms were less upbeat about their outlook for production over the coming year with sentiment falling to a five-month low.

In other areas, cost pressures were sharp, but moderated further in December. Rising expenses were partially passed through in the form of higher selling charges. The headline seasonally adjusted index registered at 56.5 in December, down from 57.2 in November.

Growth has been seen in each month since July 2020, but the latest expansion was the weakest for five months. A moderation in output growth was a key factor weighing on the headline PMI in December.

Survey comments suggested that whilst demand for Canadian manufactured goods was strong, there were staff shortages and delays in the receipt of inputs. Exports also rose during the month, with sales to international markets expanding in each month since February. With output requirements rising sharply firms added to their headcounts at a pace that was broadly similar to those seen over the last five months. Panellists mentioned that whilst firms were able to source skilled labour it was not sufficient to tame a rise in backlogs. Outstanding business has now increased in each of the last 17 months, with the latest rise amongst the steepest in the current sequence.

Goods producers continued to register substantial deteriorations in vendor performance with lead times lengthening at rates that were among the most marked in the series history. Raw material scarcity, poor weather conditions, COVID-19 and staffing issues were attributed to the latest decline. As a result, firms added to their inventories, as has been the case over the last 11 months. Higher output requirements, delivery delays, price hikes and material scarcity were among the key reasons mentioned by respondents.

Cost burdens soared once again with limited supplies for inputs exerting upwards pressures on costs. Higher prices were reported for resin, metals, and transportation. The rate of cost inflation was the softest since March, however. Subsequently, firms raised their selling prices at a softer pace, but one that was still sharp by historical standards. Finally, the Omicron variant and supply-side issues caused some concern over the long-term expectations for output. Firms were nevertheless optimistic that greater consumer demand will support production growth in 2022.

"Whilst on the whole latest data are positive, it is difficult to ignore the impacts of the pandemic on the sector,” Patel said.

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