Canadian manufacturing sector returns to growth in March

Canadian manufacturers indicated a positive end to the first quarter, with  production  and  overall  new  orders  returning  to  growth  after  a sustained period of decline. Stronger export demand was a key driver behind the rebound in manufacturing conditions, with new work from abroad rising at the joint-fastest pace since November 2014. Survey respondents noted that exchange rate depreciation had encouraged greater focus on export markets in recent months, which helped to boost  sales  to U.S. clients  in  particular. Manufacturers nonetheless continued to experience strong input price inflation as suppliers passed on higher imported raw material costs, which contributed to another solid rise in factory gate charges in March.

The headline figure derived from the survey is the RBC Canadian Manufacturing Purchasing Managers’ Index (PMI), which is designed to provide timely indications of changes in prevailing business conditions in the Canadian manufacturing sector. PMI readings above 50.0 signal an improvement in business conditions, while readings below 50.0 signal deterioration.

At 51.5 in March, up from 49.4 in February, the seasonally adjusted RBC  Canadian  Manufacturing  PMI  posted  above  the  critical  50.0 no-change threshold for the first time in eight months. Moreover, although  pointing  to  only  a  moderate  improvement  in  business conditions, the index was the highest since December 2014.

Modest rebound in production
The  upturn  in  manufacturing  performance  was  underpinned  by a  modest  rebound  in  production  during  March,  which  ended  a seven-month  period  of  falling  output  volumes.  Reports  from  survey respondents  suggested  that  a  combination  of  stronger  demand conditions and the desire to stabilize inventories had acted as a  boost to production schedules. Some firms also noted that efforts to improve productivity at their plants had supported output growth in March.

Weak demand in energy sector
Latest  data  highlighted  an  increase  in  overall  levels  of  new  work for the first time since August 2015 and, although only moderate, the  pace  of  expansion  was  the  fastest  for  15  months.  The  main reasons cited were greater export sales, new product launches and competitive pricing strategies. Manufacturers also continued to report weak demand from clients in the energy sector. At the same time, new orders from abroad rose for the fifth month running, and the pace of expansion was the joint-fastest since November 2014.  Manufacturers  continued to report cautious job hiring strategies at their plants. However, the latest survey indicated that overall payroll numbers stabilized in March, thereby ending an eight-month period of falling workforce levels. Meanwhile, a lack of pressure on operating  capacity  persisted  as  backlogs  of  work  dropped  again across the manufacturing sector.

Renewed  production  growth  and  a  rebound  in  new  work  resulted in greater input buying during March. Although only marginal, the upturn  in  purchasing  activity  was  the  fastest  since  January  2015. Some firms also noted efforts to boost pre-production inventories amid lower stocks and longer lead-times from suppliers.

On the prices front, latest data pointed to a robust pace of cost inflation. Despite reports of squeezed pricing power, manufacturers passed on a proportion of their higher costs to clients in March, with the rate of charge inflation picking up slightly since February.