Higher interest rates and growing concerns of a recession are weighing on Canadian manufacturers output projections for the year ahead, according to S&P Global Canada. PHOTO courtesy of Stellantis.
The final quarter of 2022 has begun with the third consecutive monthly deterioration in business conditions for the country’s manufacturers, according to S&P Global Canada.
“The rates of decline in both output and new orders quickened while firms continued to indicate a further shortage of skilled staff. Panel comments alluded to weak demand, while sentiment moderated to the weakest since May 2020 amid growing concerns of a recession and macroeconomic troubles in the months ahead,” S&P Global Canada states in a release. “Prices data meanwhile revealed a fourth successive slowdown in input cost inflation. However, recent currency weakness led Canadian firms to protect profits by hiking their selling prices.”
The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) registered at 48.8 in October, down from 49.8 in September. The latest result pointed to a quicker deterioration in operating conditions, and one that was the second-strongest since the tail-end of the first wave of the COVID-19 pandemic in June 2020. The index needs to register at 50.0 or above to indicate growth.
Weak demand conditions were apparent in October’s survey data with firms often mentioning that high prices deterred demand. New orders fell solidly and at one of the quickest rates in the survey’s history. Export conditions were also subdued with international demand for Canadian goods contracting for the fifth month in succession.
Mirroring the trend for new orders, production levels declined at an accelerated pace. The rate of decrease was solid with almost 16% of firms recording a drop in output in October. A number of factors were blamed for the fall including weak demand, labour shortages and supply troubles.
That said, delivery delays were the least pronounced since before the COVID-19 pandemic in February 2020, indicating some signs of easing supply-chain pressures.
Nevertheless, sustained periods of contractions in output and new orders resulted in a third successive monthly fall in buying activity. Pre-production inventories meanwhile stabilised.
Firms sought to scale back their holdings of finished items in October with stocks declining fractionally. The latest result brought an end to three months of accumulation, which was the longest sequence of growth for over eight years.
On the jobs front, voluntary resignations, staff retirements and shortages of skilled labour resulted in a modest fall in headcounts. A further decline in backlogs suggested firms were still able to keep-up with inflows of new work, however.
Input prices incurred by manufacturers in Canada increased, but the rate at which costs rose was the weakest for 23 months and only marginally above the long-run trend level.
Despite this, firms hiked their selling charges sharply and at a quicker pace amid unfavourable exchange rate movements against the US dollar.
Looking ahead, while firms remained optimistic about their output levels in the year ahead, the degree of positivity was the weakest for 29 months. Firms hoped for greater demand and a recovery in labour force numbers, but there were growing concerns over a recession and the implications of higher interest rates.
“Manufacturing businesses in Canada are continuing to consider their plans for the future, especially as the economic environment becomes increasingly difficult to navigate. Panel comments indicated higher interest rates and growing concerns of a recession weighed on output projections for the year ahead which slumped to a 29-month low,” commented Shreeya Patel, Economist at S&P Global Market Intelligence. “Positives can however be drawn from prices data which signalled another moderation in input cost inflation. Firms have also reacted quickly to the recent weakness in the Canadian dollar – which they hope is a temporary blip – by hiking their selling charges to protect profits.”
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