Canada's Manufacturing Growth Slows as Trade War Fears Bite

Canadian manufacturing activity slowed in January as uncertainty surrounding US trade tariffs weighed on confidence, Reuters reported, citing an S&P Global survey. While the Purchasing Managers' Index (PMI) remained above the 50-point expansion threshold for the fifth consecutive month, the slowdown highlights the impact of President Biden's tariffs imposed on Canadian goods.

The S&P Global Canada Manufacturing PMI dipped to 51.6 in January, down from 52.2 in December. This follows the US administration's imposition of 25% tariffs on goods from Canada and Mexico, aimed at stemming the flow of fentanyl and illegal immigrants. Canada, in turn, retaliated with 25% tariffs on US goods.

"January's survey highlighted the complex impact that possible U.S. tariffs are presently having on the Canadian manufacturing economy," said Paul Smith, economics director at S&P Global Market Intelligence, in a statement.

Despite the slowdown, the new export orders index saw its first increase in 17 months, rising to 50.3. This uptick is attributed to clients front-loading orders to mitigate the potential impact of the tariffs. However, the threat of an extended trade war is creating significant uncertainty in the market.

"Firms noted that clients in some instances were bringing forward their orders to get ahead of these potential tariffs, and output amongst manufacturers was being raised in response," Smith said. "However, the threat of tariffs from the U.S. is leading to a huge amount of uncertainty in product markets, and firms are growing increasingly concerned about a potential trade war with a key trading partner."

The slowdown is also reflected in the decline of the output index to 52.3, down from 53.0 in December. The measure of future output, at 57.1, reached its lowest point since July.

Contributing to the cost pressures is the strengthening US dollar, which hit a 22-year high against the Canadian dollar. This has led to increased material costs for Canadian manufacturers. The input price index climbed to 58.3, its highest level since April 2023.

The Bank of Canada last week expressed concerns about the potential for US tariffs to fuel persistent inflation, prompting a 25-basis point interest rate cut to 3%.