Canadian manufacturing growth picked up in February, report says

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A robust expansion in new orders helped underpin another solid improvement in operating conditions across the Canadian manufacturing sector during February, a new report from market research firm IHS Markit said.

“The improving demand environment and a rise in backlogs encouraged firms to add to workforces, while sustained growth in output led to another increase in purchasing activity,” the report said. However, the latest survey data continued to reveal intense supply chain pressures, with delivery times lengthening markedly. “Firms often mentioned that restrictions, implemented to curb the spread of the coronavirus disease 2019 (COVID-19), had often led to material shortages and transportation delays,” the report said. “As a result, manufactures incurred higher costs through supplier surcharges.”

The report also said that a boost to domestic demand underpinned another solid increase in new orders. “That said, foreign demand for Canadian manufactured goods rose only fractionally at the start of the year as pandemic restrictions continued to hinder exports, IHS Markit said.

Output volumes rose in the latest survey period, although the rate of expansion eased to the softest in the current eight-month sequence of growth. “Production schedules were supported by higher new order volumes, although pandemic restrictions weighed slightly on output, according to panellists,” the report said. “To cater for a sustained rise in production, firms added to their workforces for the eighth month in a row. The overall rate of job creation was solid and accelerated from that seen in January.” But the report also noted that a further increase in outstanding work added to signs of capacity pressures with firms citing a combination of rising new orders and difficulty obtaining inputs contributed to the accumulation. “Higher backlogs also reflected another marked lengthening in delivery times during February,” the report said. “Firms suggested that transportation bottlenecks and stock shortages led to another deterioration in vendor performance.”

Indeed, the degree to which lead times lengthened was among the greatest in the series history (since late-2010). “Eight consecutive months of rising new orders contributed to a further increase in purchasing activity,” the report said. “That said, stocks of inputs grew only fractionally, which firms attributed to material shortages. Meanwhile, post-production inventories were depleted markedly.”

On the price front, IHS Markit noted that “intense cost pressures” persisted with the rate of input price inflation accelerating in February, with higher materials – mainly metals – and transportation costs often being mentioned. “Firms reported passing on cost burdens to customers, with the rate of output price inflation quickening during the month,” the repot said.

Finally, sentiment regarding production over the next 12 months remained upbeat, with the degree of optimism reaching a five-month high. “Panellists mentioned hopes of the complete easing of virus-related restrictions following a largely successful vaccine rollout programme,” the report said.

“The latest PMI data highlights another solid improvement in the overall health and resilience of Canada’s manufacturing sector,” said Shreeya Patel, an economist at IHS Markit. “An improving domestic demand picture, greater purchasing activity, and a sustained period of employment suggests firms expect greater output in the months ahead. That said, COVID-19 continues to pose its threats with severe transportation bottlenecks impacting the supply of inputs. As a result, firms faced sharper cost pressures which were consequently passed on to customers. Meanwhile, foreign demand for Canadian goods was relatively weak as international markets continue to face business closures amid restrictions. Nevertheless, Canada’s manufacturing sector extended its uninterrupted sequence of expansion to eight months. Moreover, firms remain widely upbeat about their growth prospects with vaccination news underpinning optimism during February.”