Pressures on supply chains continued, driven by a rebound in demand for inputs
Canada’s manufacturing sector remained on track to record its fastest quarterly upturn in business conditions since Q4 2014. February data revealed robust and accelerated growth in new order intakes, input buying and production levels. This contributed to a sustained recovery in job creation and business confidence across the manufacturing sector.
Meanwhile, pressures on supply chains continued in February, driven by a rebound in demand for inputs. The latest survey also revealed a strong rise in average cost burdens, largely reflecting higher commodity prices on world markets. At 54.7 in February, up from 53.5 in January, the seasonally adjusted Markit Canada Manufacturing Purchasing Managers’ Index (PMI) signalled the strongest improvement in business conditions since November 2014. The average reading for Q1 2017 so far (54.1) is up from 51.5 in Q4 2016 and the highest quarterly figure for over two years.
Faster rates of output and new business growth were the main factors boosting the headline PMI in February. In both cases, the rate of expansion was the steepest since late-2014. Survey respondents noted that greater demand from domestic markets, especially the energy sector, had underpinned the improvement in manufacturing growth. There were also reports that the upturn in new order intakes had been supported by customers’ efforts to replenish inventories. Meanwhile, export sales growth remained subdued, and therefore provided only a marginal contribution to overall new business gains in February.
The latest survey pointed to a rebound in manufacturing sector confidence regarding the year-ahead business outlook. Moreover, the degree of positive sentiment reached its strongest for exactly three years. This was linked to resurgent optimism about domestic demand and the general outlook for the Canadian economy. Greater business confidence contributed to the strongest increase in employment for 27 months in February.
Manufacturers also sought to boost their stocks of finished goods in line with expectations for improved sales growth. The rise in post-production inventories was the strongest since April 2014. However, stocks of inputs were depleted in February, which was attributed to rising demand for inputs and longer delivery times from suppliers.
Meanwhile, a strong rate of input cost inflation persisted in February, with the latest reading only fractionally below the 31-month peak seen at the start of 2017. Manufacturers commented on rising raw material costs, particularly for metals and oil-related inputs. This led to a solid increase in factory gate charges, although the rate of output price inflation slipped to a three-month low.