TORONTO, Ont.– May data from the RBC PMI highlighted that Canadian manufacturers experienced another modest upturn in overall business conditions in May, which marked three months of sustained improvement.
Output growth expanded at its fastest pace for almost one year, but the latest survey pointed to slightly weaker rates of new business and employment growth. There were also signs of pressure on operating margins as input cost inflation accelerated in May, while output charges were broadly unchanged, the release said.
A monthly survey, conducted in association with Markit, a global financial information services company and the Supply Chain Management Association (SCMA), the RBC PMIoffers an early indicator of trends in the Canadian manufacturing sector.
At 52.1 in May, the seasonally adjusted RBC Canadian Manufacturing PMIwas above the neutral 50.0 mark and only fractionally lower than the 16-month high of 52.2 recorded in April. As a result, the headline index indicated another moderate improvement in business conditions across the manufacturing sector, mainly supported by greater levels of output, new business and employment in May. Moreover, the average PMI reading so far this quarter indicates the strongest growth momentum since Q4 2014.
“The latest data reflects mixed results in the manufacturing sector during May. While production and new orders are up, the fall in export sales raises questions about Canada’s transition to a more export-led expansion.” said Craig Wright, senior vice-president and chief economist, RBC. “Quebec manufacturing was a bright spot and Ontario remains the best performing in terms of export and jobs growth, but B.C. and Alberta continued to decline and the forest fires in Fort McMurray, Alberta are expected to put further pressure on both the manufacturing sector and overall economic indicators in Alberta.”
The headline RBC PMI reflects changes in output, new orders, employment, inventories and supplier delivery times.
Key findings from the May survey included:
Sharpest increase in production volumes since June 2015
New order growth loses momentum amid slight fall in export sales
Rate of job creation moderates from 16-month high recorded in April 2016
May data signalled a solid expansion of production volumes, with the latest rise the fastest since June 2015. Survey respondents noted that greater new business volumes and improved confidence regarding the general economic outlook had underpinned the increase in output levels. New order volumes picked up for the third month running in May, which mirrored the trend recorded for production volumes across the manufacturing sector. However, the latest survey signalled a slight loss of momentum from the 16-month high seen during April.
Anecdotal evidence suggested that new product launches and gradually improving demand conditions had supported manufacturing sales, while subdued investment spending and cautious inventory management among clients remained key growth headwinds. Export sales were also a drag on overall new business intakes across the manufacturing sector in May. Although only marginal, the reduction in new work from abroad was the first since October 2015.
Manufacturing firms boosted staffing levels in May, as has now been the case for the past three months. Another increase in staff recruitment helped to drive a modest reduction in work-in-hand (but not completed) across the manufacturing sector, thereby extending the current period of backlog depletion to 18 months running.
The latest survey pointed to cautious inventory policies at manufacturing firms in May. Stocks of finished goods declined at the fastest pace since January, while pre-production inventories fell despite higher volumes of input buying. Moreover, lead-times from vendors lengthened amid reports of capacity cuts and reduced stocks among suppliers.
Meanwhile, input cost inflation accelerated over the month, which survey respondents mainly linked to higher steel prices and the weak exchange rate. Factory gate charges were nonetheless broadly unchanged in May, which firms linked to weak pricing power and intense competitive pressure.
“The good news is Canada’s manufacturing sector is experiencing its strongest period of growth for around a year- and-a-half. Greater workloads have boosted production and jobs through the second quarter of 2016. Quebec had a good month, recording its best overall performance since 2012.” said Cheryl Farrow, president and chief executive officer, SCMA. “There was a slight loss of momentum in May, as a dip in exports and weak capital spending dampened new business growth for Canada’s manufacturers. The recovery in demand put Canada’ssupply chains under pressure last month with evidence of longer lead times and depleted stocks of raw materials.”