Slight improvement in Canadian manufacturing operating conditions during April

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Canada's manufacturing sector returned to growth in April but remains on shaky ground with another drop in new orders. PHOTO courtesy CAMBRIO. 

Operating conditions in Canada’s manufacturing sector were little-changed during April, according to analysis from S&P Global Market Intelligence.

Although output and employment both increased, order books fell modestly, and firms were cautious with regards their purchasing and stock management policies. Confidence in the future was a little lower, whilst input prices increased at a sharper rate. Output prices, however, rose to the weakest degree in nearly three years.

“Although Canada’s manufacturing sector returned to growth in April, it did so only marginally with underlying data suggesting the recovery remained on shaky ground. Output and employment growth were sustained, but another drop in new orders is probably the most notable development. Clients are hesitant in their spending decisions, unsure of the direction of the economy at a time when prices remain high,” said Paul Smith, Economics Director at S&P Global Market Intelligence.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) posted 50.2 during April, up from March’s 48.6. Posting just above the crucial 50.0 no-change mark that separates growth from contraction, the index signalled a marginal improvement in operating conditions since the previous month.

Growth was linked to a marginal rise in output. Firms attributed this in part to a rise in capacity capabilities, with some panellists signalling better stability in labour provision.

Employment growth was sustained, and the rate of increase accelerated since March to reach its highest level since June 2022. Companies reported that jobs were added in anticipation of higher sales, but also to help to keep on top of workloads. Levels of work outstanding declined for a ninth successive month, and the rate of contraction was again solid.

Firms were able to make cuts to backlogs due to extra capacity and increased output, but also because incoming new orders fell modestly for a second successive month.

Export sales were also down again, extending the current sequence of contraction to just under a year. Firms reported hesitancy amongst clients in decision-making, reflective in part ongoing concerns over elevated inflation and the future direction of the economy. These factors also weighed on confidence amongst Canadian manufacturers themselves, with optimism down on March’s 11-month high and to a level just below trend.

Prices paid for inputs rose sharply in April, with the rate of inflation accelerating to its highest level of the year so far.

Companies signalled costs were rising generally across a wide range of goods. Higher transportation costs were also cited as a factor driving inflation. There were also reports of higher supplier surcharges being applied. This was despite some signs of improved stability in the supply of inputs.

“Cost inflation especially remains stubbornly high, with prices increasing to the strongest degree of the year so far. But manufacturers found themselves facing a tricky dilemma: although margins are under pressure from elevated costs, equally underwhelming demand is bearing down on their pricing power. No wonder then that firms continued to adopt cautious approaches to purchasing and stock management, and that confidence in the future took a knock in April,” Smith said.

Latest data showed that average lead times worsened again in April, but only slightly and to the smallest degree in over three-and-a-half years of worsening supplier performance.

Reduced demand also lowered pressure on vendors. Manufacturers cut their purchasing activity for a ninth successive month. Companies were hesitant in their spending against a backdrop of underwhelming sales and demand. Firms instead chose to utilise stocks wherever possible, cutting their inventories of purchases for a ninth successive month. However, the rate of contraction was modest, and much lower than in March.

With manufacturers facing the opposing forces of sharply rising input costs but soft sales, output charges continued to be increased during April. However, the rate of inflation was the lowest recorded by the survey in just under three years.

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