Morning Market Brief: March 5, 2024

Canada’s manufacturing sector posts another contraction?

In February, Canada’s manufacturing sector activity contracted for the 10th straight month. As central banks have pushed up policy rates, thus tightening financial conditions and weighing on demand, manufacturing sector activity has been hindered here in Canada and elsewhere. Coming out of the pandemic, we have also seen a shift in spending to services and experience-related goods, rather than tangible, manufactured goods.?

• The S&P Global Canada Manufacturing Purchasing Managers Index rose to 49.7 in February from 48.3 in January. Despite rising, manufacturing sector activity was still in a contraction (as denoted by a reading under 50.0). However, it was the slowest pace of contraction over the last 10 months, suggesting further improvement might be ahead for the sector.
• The sector continued to be hindered by relatively weak demand. New orders continued to contract, albeit the pace of contraction in February was not as deep as it was in January. The weakness in new orders weighed on output over the month.
• On the positive side, employment expanded over the month, its first increase in the past four months. Manufacturing firms are hopeful that demand will begin to pick up in earnest, which will require more workers to increase output and fulfill that demand.
• Canada’s not alone in its weaker manufacturing sector. Europe posted contractions in February, particularly in Germany, as did the UK and Japan. Conversely, manufacturing activity in the US and China expanded, albeit at relatively slow paces.

Canada’s economy relies on a healthy and strong manufacturing sector. As the sector has contracted in recent years, it has weighed on overall economic activity. The Bank of Canada (BoC) makes its next interest-rate announcement on Wednesday, where it is expected to hold steady at 5.00%. However, expectations are that the BoC will begin cutting rates sometime in 2024.

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