Canada factory activity shrinks on sagging output, new orders

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FILE PHOTO: Workers make jackets at the Canada Goose factory in Toronto

OTTAWA (Reuters) - Canadian manufacturing activity contracted in August for the first time since the early stages of the COVID-19 pandemic, amid stronger declines in output and new orders, and the first drop in employment in two years, data showed on Thursday.

The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 48.7 in August from 52.5 in July, its lowest level since June 2020. A reading below 50 shows contraction in the sector.

"Firms and consumers alike have adopted a cautious approach to their purchasing habits over the last few months," Shreeya Patel, an economist at S&P Global, said in a statement.

"Growing uncertainty, interest rate hikes, high inflation and persistent supply-chain pressures are no doubt the drivers of the latest drop."

Both the output and new orders indexes sank further below the 50 threshold, hitting 45.5 and 44.4 respectively. Manufacturers pointed to client hesitancy, growing uncertainty and a general lull in domestic demand conditions.

International demand also weighed, with exports falling sharply and at the quickest rate since June 2020.

The employment index dipped to 48.8, the lowest level since June 2020. At the same time, input cost inflation eased to a 19-month low.

"While on the whole data looks bleak, positives could also be drawn, particularly on the price front where rates of inflation eased significantly in August," said Patel.

Looking ahead, firms were "widely upbeat" about their prospects for output growth over the coming months, though the degree of confidence has eased as recessionary fears mount, S&P Global said.

The Bank of Canada surprised with a 100-basis-point rate increase to July to 2.5%, with another oversized hike expected at the next decision on Sept. 7.

(Reporting by Julie Gordon in Ottawa; Editing by Chizu Nomiyama)