Canadian Economic Activity Contracts for the First Time in Over a Year

Canadian economic activity took a downward turn in August, marking its first contraction in 13 months, according to the latest data from the Ivey Purchasing Managers Index (PMI) released on Friday. The decline reflects a significant slowdown in employment growth and a sharp increase in price pressures, signaling potential challenges ahead for the Canadian economy.

Activity Slips Below Growth Threshold

The seasonally adjusted Ivey PMI, which tracks month-to-month changes in economic activity through a survey of purchasing managers across Canada, fell sharply to 48.2 in August. This is a substantial drop from July’s reading of 57.6 and represents the first time the index has fallen below the 50-point threshold since July 2023. A PMI reading below 50 indicates a contraction in economic activity, while a reading above 50 signals expansion.

The dip in the index suggests that Canadian businesses are experiencing slowing momentum as inflationary pressures mount and employment growth weakens. The decline comes as a surprise after over a year of steady expansion and raises concerns about the outlook for the broader economy.

Employment Growth Slows

The employment component of the index also showed signs of weakening, falling to a seasonally adjusted 54.7 in August, down from 56.1 in July. While a reading above 50 still indicates growth in employment, the drop suggests that the pace of job creation has slowed considerably.

This slowdown in employment growth coincides with broader labor market trends that have shown signs of cooling in recent months. Canada’s unemployment rate edged up in July, and employers have reported increasing difficulty finding workers, which could further dampen future hiring efforts.

Price Pressures Intensify

In contrast to the weakening employment picture, the prices index surged to 63.4 in August, up from 59.2 in July, marking the highest level since May. This sharp rise in price pressures indicates that Canadian businesses are facing increasing costs for goods and services, which could exacerbate inflationary concerns. The surge in prices may be driven by ongoing supply chain disruptions, higher energy costs, and continued demand for key materials.

The rising price pressures will likely place further strain on Canadian consumers, who are already grappling with higher living costs. For the Bank of Canada, this data adds complexity to its efforts to balance inflation control with supporting economic growth, as it navigates monetary policy decisions in the coming months.

Unadjusted PMI Reaches Yearly Low

Meanwhile, the unadjusted Ivey PMI, which provides a broader snapshot of economic activity, also declined to 50.3 in August from 55.3 in July, its lowest reading so far this year. While the unadjusted index remains slightly above the contraction threshold, the sharp decline underscores the overall weakening trend in economic activity.