Canada’s services economy hit a sharper contraction in September, as business activity and employment fell back into contraction, according to S&P Global data released on Friday.
The headline Business Activity Index plunged to 46.3 in September compared to 48.6 in August, the lowest reading since June, and the sector’s downturn extended to a 10th month.
Any reading below 50 represents contraction. The September outcome reinforces still-sluggish service sector activity, which makes up most of the Canadian economy.
Jobs and work backlogs weaken
New survey data showed declining employment and outstanding work, suggesting increasing signs of excess capacity.
The employment index dropped to 48.9, which indicated its first contraction since April, and the backlog measure sank to 42.9, from 46.3 in August and the lowest since June 2020.
According to Paul Smith, economics director at S&P Global Market Intelligence, service providers faced “a tough trading environment” throughout the month.
He also added that, “excess capacity in the services economy was highlighted by the dual reductions in both employment and work outstanding.”
In both the construction and manufacturing sectors, new work growth remained subdued, confirming the weak demand conditions that characterise the broader industry.
Businesses continue to find it hard to secure sufficient new orders to replace the high levels of work in hand they enjoyed earlier in the year, linked to a limited pile of projects ready to start.
Risks tilt to the downside
With employment sliding, corporate activity falling, and demand indicators suggesting protracted weakness, Smith believes the risks to Canada’s economy remain skewed to the downside.
The report provides additional justification for the Bank of Canada’s recent interest rate drop, which aimed to bolster the economy amid global challenges.
Last month, the central bank cut its benchmark interest rate to 2.50%, the lowest level in three years, to provide respite as the economy grapples with poor global commerce.
A trade war driven by the United States has harmed both confidence and exports in Canada.
Optimism on future activity
Although current performance remains muted, the service providers expressed a higher level of optimism for business in the next twelve months.
The forward-looking activity index increased to 62.2 in September from 58.2 in August, the highest reading in 11 months.
Such progress indicated that businesses were optimistic about reasonable prospects of a stable macroeconomic environment in the future, even as immediate hindrances loomed large.
Firms placed increased faith in conditions improving once previously tighter financial markets assimilate to recent monetary stimulus and global demand pressures equilibrate.
The composite PMI reflects weakness
The broader Canadian private sector also demonstrated symptoms of distress.
The S&P Global Canada Composite PMI Output Index fell to 46.3 in September from 48.4 in August, marking its lowest reading since June.
The indicator measures combined activity in manufacturing and services.
Separate results released earlier this week showed that manufacturing was also declining.
Canada’s Manufacturing PMI dipped to 47.7 in September, down from 48.3 the previous month, as an uncertain trading environment weighed on output and new orders.
A dual-sector downturn
Combined, the most recent PMI numbers revealed both services and manufacturing entering deeper into contraction.
The drop in manufacturing underscored disruption from pressures building in global trade, while the services slump signalled domestic weakness in employment and demand.
This is particularly significant given the outsized role of the service sector in the Canadian economy — not just when it comes to consumer spending, but also business support activities.
Continued reduction of jobs within the sector may also contribute to the broader trend in the number of jobs over the coming months.
Outlook depends on policy and trade
Looking ahead, the Canadian economy’s durability may be determined by whether monetary easing and policy stability expectations can offset chronic structural problems.
The Bank of Canada’s decision to decrease interest rates showed its acknowledgement of downside risks, but the impact of that action will take time to manifest.
With both services and manufacturing contracting, the near-term prognosis indicates sluggish growth pace.
However, a better attitude about future activity shows that businesses are confident that conditions will progressively improve.
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