Key Takeaways:
Canada's factory sector expanded for a sixth straight month in June, but the strongest cost pressures in nearly four years and a deepening trade rift with the U.S. threaten to stall the recovery.
Canada's manufacturing sector expanded for a sixth consecutive month in June as output and hiring picked up, though input costs surged at the fastest pace in nearly four years on supply disruptions and U.S. tariffs.
"Growth is still partly driven by stockpiling as firms and their clients continue to face substantial supply-side disruption," said Paul Smith, economics director at S&P Global Market Intelligence.
The S&P Global Canada Manufacturing PMI edged up to 53.0 from 52.9 in May, remaining above the 50 threshold that separates expansion from contraction. The employment sub-index rose to 51.9, its highest since October 2024, as factories added staff to manage rising workloads. The input price index climbed to 67.2 from 66.5, the highest since July 2022, fueled by higher energy costs, transportation expenses and U.S. tariffs on steel, aluminum and autos.
The data offers some comfort to Canadian policymakers after two straight quarters of negative growth, with April GDP data pointing to annualized second-quarter expansion above 2%. But the Trump administration's July 1 decision not to renew the USMCA trade pact unless changes are made injects fresh uncertainty into an outlook already clouded by tariff-driven cost inflation and Middle East shipping disruptions.
Input Costs Surge as Supply Chains Stretch
Suppliers' delivery times lengthened to the greatest degree since September 2022 as the Middle East conflict disrupted global shipping routes, delaying raw materials and intermediate goods. The war-driven delays compounded existing pressure from U.S. tariffs on key Canadian industrial sectors, including steel, aluminum, automobiles and forest products. Statistics Canada data show manufacturing output fell 1.2% in April from a year earlier, while factory payrolls declined 1% over the same period.
Despite the headline PMI expansion, business confidence slipped to a three-month low, S&P Global said. "Companies retained a degree of confidence that production will continue to rise over the year ahead," the report noted. "However, worries over U.S. tariff policy continued to weigh on confidence."
Trade Uncertainty Clouds the Outlook
The Trump administration on July 1 said it would not renew the existing U.S.-Mexico-Canada trade treaty as required under the agreement's terms unless America's trading partners agree to changes. The decision subjects the pact to annual reviews for a decade, a shift economists say is likely to keep business uncertainty at historically elevated levels.
The Bank of Canada has said there is limited evidence that higher energy prices have spread to other goods and services, in part because companies are reluctant to raise prices given underlying economic weakness. Yet the PMI data suggests that calculus may be shifting. Input prices for factory owners rose at their steepest pace in nearly four years, even as producer prices — what manufacturers receive for their goods — softened to a three-month low, squeezing margins across the sector.
This article is for informational purposes only and does not constitute investment advice.
