Canada’s Services Sector Hits a Roadblock
Postal Strike and Cautious Clients Weigh on Activity
Canada’s services economy took a surprising turn for the worse in December, snapping a three-month growth streak. The latest data from S&P Global’s Canada services PMI reveals a decline in business activity, with the headline index plummeting to 48.2 from 51.2 in November.
Underlying Demand Disappoints
The downturn was partly attributed to the month-long postal workers’ strike, which ended in mid-December. However, Paul Smith, economics director at S&P Global Market Intelligence, notes that underlying demand was also a major contributor to the decline. “Clients were cautious and unwilling to commit to new work as 2024 drew to a close,” Smith explained.
New Business and Exports Take a Hit
The new business index suffered a significant drop, falling to 46.4 from 50.1 in November. Meanwhile, the measure of new export business hit its lowest level since December 2020, at 39.7. The looming threat of a 25% tariff on all imports from Canada, proposed by U.S. President-elect Donald Trump, may have contributed to this decline.
Excess Capacity and Economic Slack
The services economy is struggling with a high degree of excess capacity, making it easy for firms to keep up with their workloads. This surplus capacity has raised concerns about economic slack, which prompted the Bank of Canada to cut its benchmark interest rate by half a percentage point to 3.25% last month.
Composite PMI Output Index Falls
The S&P Global Canada Composite PMI Output Index dropped to 49.0 in December, down from 51.5 in November. While factory activity experienced a fourth consecutive month of growth, the downturn in the services sector offset this gain.
Manufacturing Sees a Silver Lining
On a brighter note, Canada’s manufacturing PMI rose to a 22-month high of 52.2 in December, driven by inventory accumulation by U.S. clients in anticipation of trade tariffs. This provided a much-needed boost to export sales.
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