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  • KPB & Co Research

IHS Markit released their May Manufacturing Purchasing Managers' Index (PMI) for Canada, and it indicates that manufacturing conditions continued to slowdown, but firms are optimistic that the economy will rebound in the months ahead. According to the report, production continued to decline on the back of the sharpest drop in new orders since December 2015, while headline inflation dropped to the slowest rate in over 4 years. At the same time firms continued to hire, and make investment in factory space, as their level of optimism remained high.

Markit Manufacturing PMI - Canada
Markit Economics

Soft Manufacturing Environment

The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers' Index (PMI) dropped to 49.1 in May coming from from 49.7 in April. The data show that all components of the index, except employment, negatively impacted the overall index. Manufacturing firms sited a decline in new orders from both domestic and external markets, and a slowdown in construction activity as the main reasons for the tighter business conditions. As a result of slower business conditions, manufacturers had to cut back on input purchases for the 3rd month in row, leading to a tempered reduction in raw material and working progress inventory, and stable finished goods inventory. The Bank of Canada, in their monetary policy release earlier last week, sited their concern about generally rising inventories since Q4 2018. The Bank's concern was around the likely slowdown in production that will follow, as firms begin to sell down some of the excess inventory. In our view, the commentary in this report highlights that firm have already started the process.

According to the report, input cost inflation remain subdued for Canadian manufacturers, with price inflation remaining at the weakest level seen in the last 4 years, and the joint weakest for the last six years. In-spite of the weaker inflation, manufacturers highlight the that the price of resin, foodstuffs, and tariffs were key concerns going forward.

Businesses Continue to Remain Positive

In-spite of the generally soft business conditions, businesses are displaying signs of an expected improvement in conditions in the near term. Manufacturing companies in Canada increased workforce numbers slightly in May, as factory space continued to expand. In addition, data on business optimism grew to the highest level seen in the last 13 months. Firms in Canada highlighted that their optimism stemmed from new products coming on stream, hiring plans, factory expansion, and signs of an uptick in the wider economy.

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