Solid growth in May as inflationary pressure builds
- June 6, 2021
Supply chain disruption still weighed down output growth, with the latest deterioration in vendor performance the third highest since October 2010.
May saw a record increase in output prices, driven by transportation and raw material surcharges.
The headline seasonally adjusted (PMI) registered 57.0 in May, down fractionally from 57.2 in April but still the fifth-strongest growth in operating conditions in the survey to date. Manufacturers reported solid growth in production volumes, although the rate of expansion slowed for the second consecutive month.
"May PMI data reveals another robust expansion across Canada's manufacturing sector with solid upticks in output and new orders registered. Policymakers will particularly welcome the stronger uplift in workforce numbers after the country saw the unemployment rate climb post-pandemic. Moreover, a sustained increase in backlogs suggests staffing in the manufacturing sector will continue to grow over the coming months,” says Shreeya Patel, economist at IHS Markit.
Meanwhile, new work increased in May with survey respondents citing greater demand from both domestic and export markets (mainly the US). Employment growth was the sharpest in five months, but sales volumes outstripped production capacity, creating an increase in backlogs. This stretched operating capacity reflected insufficient workforce and supplier delivery delays. Firms added to their headcounts at the strongest rate since December 2020, to address this backlog.
Supply chains continued to be impacted by COVID-19 restrictions, with vendor performance slowing, forcing firms to increase purchasing and pre-production stockpiles.
These capacity pressures and limited material availability meant stocks of finished goods were depleted for a second month in a row.
Input prices rose at the fifth-strongest rate in the series history, with companies overwhelmingly linking the pandemic to higher freight and raw material costs. Manufacturers passed on those costs, pushing output price inflation to another record high.
“Vendor performance continued to deteriorate in May. Lead times lengthened at the third most marked rate in the near 11-year history of the survey, which has had knock-on effects on prices and input availability. Raw material and transportation expenses soared, with firms rushing to adding to their stockpiles in a bid to offset future delays. A record increase in output prices suggests a large proportion of the burden was passed on to clients, but manufacturers will find the building inflationary pressures unsustainable," says Patel.
Slower output and new order growth influenced sentiment in May, with output expectations softening to a four-month low.
Nevertheless, optimism remained relatively strong overall, reflecting hopes that lifting pandemic restrictions will spark a strong rebound.