Canadian manufacturing conditions deteriorate but inflation pressure is easing

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Interest hikes and client uncertainty is placing a damper on demand but the latest economic data is also showing a slowdown in inflation pressures. PHOTO courtesy Honda

The latest data for Canada’s manufacturing sector signalled another difficult month with output and new orders falling once again, according to the latest S&P Global Canada economic analysis.

“The close of the third quarter yielded a mixed bag of results for Canada’s manufacturing sector with a back-to-back deterioration in operating conditions recorded during September,” says Shreeya Patel, Economist at S&P Global Market Intelligence.

Demand was hit by interest rate hikes and client uncertainty while firms grew less optimistic over their output expectations for the year-ahead. Subsequently, staffing levels, purchasing activity and inventory holdings all fell for the second month in a row.

There were, however, positives in the latest numbers.

“Not all is gloom and doom with the latest data also pointing to a slowdown in inflation. Both output charge and input price inflation moderated to 22-month lows and were only just above their respective long-run series averages, suggesting tighter monetary policies are having the desired effect on price pressures,” Patel says.

Firms continued to pass on higher cost burdens on to their clients, though selling prices also rose at the weakest pace for 22 months.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) registered at 49.8 in September, up from 48.7 in August, indicating a second monthly deterioration in manufacturing performance. The latest fall was only slight, however, with the headline figure improving from that seen in August and only fractionally below the 50.0 neutral value, which indicates growth.

A solid reduction in new orders was central to the latest decline. According to comments from those responding to the survey, interest rate hikes, and weak macroeconomic conditions led clients to refrain from placing orders. A similar trend was seen with regards to exports which declined for the fourth month running. That said, the rate of contraction in both cases eased from those seen in the previous survey period.

Production levels in Canada’s manufacturing sector fell for the third month running in September with manufacturers attributing the fall to a subdued demand environment and a lack of material availability. That said, the rate of decline was modest and eased notably from that in August.

With new orders falling, there were further signs of spare capacity in Canada’s manufacturing sector. Backlogs fell at a solid and accelerated pace.

The lack of pressure on operating capacity across Canada’s manufacturing sector led firms to cut their headcounts, for the second month in a row. Canadian firms also attributed job shedding to cost-saving efforts.

Sustained reductions in output and difficulties sourcing some inputs led to a decline in purchasing activity in September. Stocks of pre-production inventories also continued to decrease.

With demand falling sharply, firms recorded an accumulation in post-production inventory holdings. The latest increase signalled three successive months of expansion, the longest sequence of growth for over eight years.

Meanwhile, vendor performance deteriorated at the end of the third quarter. That said, lead times lengthened to the least extent for over two-and-a-half years.

Looking ahead, firms were still optimistic that their output levels would grow over the coming 12 months, but the degree of sentiment was the fifth-weakest since the question was first put forward in July 2012. Anecdotal evidence pointed to greater concerns over a recession. Rising interest rates and weak demand also weighed on confidence.

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