RBC report finds manufacturing sector outlook in three month low

By awrara ra

June data suggested that the Canadian manufacturing recovery stepped down a gear at the end of the second quarter, with output, new business and employment growth all easing slightly since May.

Moreover, new export orders were virtually unchanged in June, which contrasted with the solid contribution to growth seen earlier in 2016. At the same time, stocks of finished goods dropped at a survey-record pace in June, with manufacturers noting that subdued client demand and uncertainty about the economic outlook had encouraged tighter inventory management at their plants.

A monthly survey, conducted in association with Markit, a leading global financial information services company, and the Supply Chain Management Association (SCMA), the RBCPMI offers a comprehensive and early indication of trends in the Canadian manufacturing sector.

Adjusted for seasonal influences, the RBC Canadian Manufacturing PMI registered 51.8 in June, down from 52.1 in May. Although the index posted above the 50.0 no-change value for the fourth month running, the latest reading signalled only a marginal upturn in overall business conditions and the weakest pace of improvement since March.

“While the slowdown in the growth of manufacturing during June is disappointing, Canadian manufacturers did indicate a marginal upturn in new business volumes,” said Craig Wright, senior vice-president and chief economist, RBC. “Currency weakness and stronger U.S. demand should drive further exports, however growing economic uncertainly means that the roller coaster we’ve experienced recently in the Canadian export market will likely continue,” added Wright.

The headline RBC PMI reflects changes in output, new orders, employment, inventories and supplier delivery times.

Key findings from the June survey included:

  • Output growth eases from May’s 11-month high
  • Marginal increase in new business volumes
  • Stocks of finished goods fall at fastest pace since the survey began in October 2010

A slowdown in output growth from May’s 11-month high was one of the key factors weighing on the headline PMI during June. The latest expansion of production volumes was the weakest since March, which manufacturers linked to softer client demand and efforts to reduce finished goods inventories at their plants. Post-production stocks have now fallen in each month since April and the latest reduction was the steepest for over five-and-a-half years.

Canadian manufacturers indicated a marginal upturn in overall new business volumes in June. The latest survey suggested that domestic sales were a key driver of growth, as new export work was broadly unchanged over the month. Higher levels of business underpinned further staff recruitment across the manufacturing sector in June, which extended the current period of net job creation to four months. However, the pace of employment growth eased slightly since May amid reports of heightened uncertainty about the business outlook and a lack of pressure on operating capacity.

Survey respondents pointed to ongoing supply chain pressures in June, with average lead-times from vendors lengthening to the greatest degree since December 2014. This was linked to unusually low stocks at suppliers and a marginal upturn in input buying among manufacturers. Despite a rise in purchasing activity, latest data signalled that pre-production inventories were broadly unchanged over the month, which firms mainly linked to cautious stock policies at their plants.

June data signalled a return to rising factory gate charges among Canadian manufacturers, although the rate of inflation was only marginal. A number of firms noted that subdued underlying demand had acted as a brake on output charge inflation and placed pressure on margins. Moreover, higher steel and fuel prices contributed to a robust rise in average cost burdens in June. The latest increase in overall input prices was the fastest recorded since March.

Regional highlights include:

  • Manufacturing business conditions improve in all regions except Alberta & B.C.
  • Quebec and ‘Rest of Canada’ record fastest rises in manufacturing output during June
  • Ontario experiences slowest pace of production growth so far in 2016

“Canada’s manufacturing sector continued to expand in June, as the latest PMI survey points to a sustained recovery in output and staff hiring through the second quarter of 2016.” said Cheryl Farrow, president and chief executive officer, SCMA. “However, manufacturers have seen export growth slow in recent months, reflecting risk aversion and heightened economic uncertainty across the global economy. Worries about the business outlook have already weighed on inventory management for manufacturers, with stocks of finished goods falling at the fastest pace for over five-and-a-half years in June.”

The report is available at www.rbc.com/newsroom/pmi.

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Read the June 2016 issue of Business Review USA & Canada magazine


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