Canadian Manufacturing Activity Remains Weak in January

By Robb M. Stewart

The latest data reveals that Canadian manufacturing activity started the new year in contraction territory, although the pace of declines in output and new orders has somewhat softened. According to the S&P Global Canada manufacturing purchasing managers index, the index rose to 48.3 in January from 45.4 the previous month, which was the lowest level since May 2020. While this marks a three-month high for the index, it also signifies a ninth consecutive month below the threshold of 50, which separates expansion from contraction.

Despite the slight improvement in numbers, Paul Smith, economics director at S&P Global Market Intelligence, has described Canada’s manufacturing sector as remaining subdued at the beginning of 2024 due to weak underlying demand for goods. This has resulted in reduced production levels, ongoing cuts in purchasing activity, and another round of job losses. However, the slower pace of declines across several measures may offer hope that the downturn is reaching its bottom.

In January, the Bank of Canada chose to maintain its benchmark interest rate at a more-than-two-decade high of 5% during its fourth consecutive policy meeting. The central bank noted that the economy is expected to remain weak until at least the middle of this year due to high interest rates hindering both household and business spending. Surprisingly, annual inflation accelerated to 3.4% in December, further exceeding the central bank’s 2% target.

Economic Recovery in the Final Quarter of Last Year

The economy appears to have made a recovery in the final quarter of last year, with industry-level gross domestic product (GDP) rising by 0.2% from the previous month. An early estimate suggests a further growth of 0.3% in December, resulting in GDP tracking a 1.2% annualized expansion for the final quarter of 2023. This positive growth follows a slight contraction in the third quarter.

Manufacturing Production Shows Continued Decline

According to a survey by S&P Global, manufacturing production has experienced a sixth consecutive month of cuts in January. However, the rate of decline has slowed down compared to the end of last year. The survey reveals that panelists commented on soft market demand and clients’ hesitation to commit to new projects due to elevated market prices.

New Export Orders Continue to Decrease

January marked the fifth consecutive month of decline in new export orders.

Marginal Job Cuts in the Manufacturing Sector

Despite an overall improvement, manufacturers continued to make marginal job cuts in January. These reductions were linked to lower production requirements and sufficient capacity.

Inflationary Pressures Ease in January

The data indicates a continued easing of inflationary pressures in January. Both input prices and output charges experienced slower rates of increase.