Rising COVID-19 cases, material shortages weigh on output growth

Growth in Canada’s manufacturing sector continued into the new year with operating conditions improving sharply in January.
According to a recent IHS Markit Canada Marking PMI report, output, new orders, purchases and employment all expanded while sentiment improved, despite delivery delays, port congestions and a rise in Omicron cases sweeping the nation.
“Another robust improvement in operating conditions was recorded in Canada’s manufacturing sector with the PMI at 56.2 at the start of the year,” says Shreeya Patel, an economist at IHS Markit. “The headline figure reflected favourable demand conditions, rising employment levels and growth in inventories.”
Other challenges identified in the report include vendor performance deteriorating sharply, resulting in poor input availability and weaker output growth, and disrupted supply chains paired with materials shortages continuing to cause sharp price pressures.
“Additionally, price pressures showed further signs of easing, with rates of output and input price inflation moderating to ten- and 11-months lows, respectively,” says Patel. “That said, COVID-19 yet again hit performance with output growth slowing notably. Tighter restrictions, among other issues, led to weak input availability and poor transportation conditions. Nevertheless, there is a further indication that restrictions will start to ease across the provinces in the months ahead. Fortunately, Canada boasts a high vaccination rate, which has allowed for growth to continue in the manufacturing sector despite a resurgence in cases.”
While output growth softened, domestic demand for Canadian manufactured goods accelerated during the start of the year.
Other report highlights:
Sustained periods of supply chain issues continued to encourage advance ordering strategies with stocks of inventories rising solidly. The rate of growth did, however, slow amid elevated costs and efforts to better control inventories.
Meanwhile, stocks of finished goods depleted further with difficulties surrounding production often mentioned by panellists.
As for prices, rising raw material costs (lumber and metal) and higher transportation fares led to another sharp rate of input price inflation. The rate of increase slowed, however, and was the softest for 11 months. Higher cost burdens were passed on to clients in January, though here also the rate of inflation moderated from that seen in December.
Finally, the 12-month outlook for output improved amid hopes of a return to normality, greater material availability and strong client demand. That said, the degree of optimism was lower than the average seen for 2021, suggesting the Omicron variant weighed slightly on confidence.