Canada’s services sector experienced a contraction in December, ending a three-month period of growth, according to the S&P Global Canada Services PMI. The decline was primarily attributed to a postal workers’ strike and a decrease in outstanding work. The index dropped to 48.2 from 51.2 in November, falling below the 50.0 mark that signifies contraction for the first time since September.
Paul Smith, economics director at S&P Global Market Intelligence, noted that the postal strikes exacerbated the downturn, but underlying demand also disappointed. Client caution and reluctance to commit to new work as 2024 concluded contributed to the decline. The month-long postal strike ended in mid-December following an order from the labor relations board. This disruption impacted business activity across the services sector.
New business also suffered a significant setback, with the index plummeting to 46.4 from 50.1 in November. New export business experienced an even sharper decline, reaching its lowest point since December 2020 at 39.7. This coincides with concerns surrounding potential trade tariffs threatened by then U.S. President-elect Donald Trump. The uncertainty surrounding future trade relationships likely contributed to the hesitation in new business ventures.
The PMI data also revealed a significant degree of excess capacity within the services economy. Firms reported an ability to manage existing workloads easily, indicating a lack of new projects. This is further supported by the outstanding business index, which plunged to a four-year low of 44.6. This economic slack has raised concerns for the Bank of Canada, prompting a half-percentage point interest rate cut to 3.25% in the previous month.
The overall S&P Global Canada Composite PMI Output Index, which combines services and manufacturing data, also reflected the economic slowdown. The index decreased to 49.0 from 51.5 in November. While the manufacturing sector experienced its fourth consecutive month of growth, reaching a 22-month high of 52.2 in December, it was insufficient to offset the contraction in the services sector. The strength in manufacturing was partly attributed to increased inventory accumulation by U.S. clients anticipating potential trade tariffs.
In conclusion, the Canadian services sector faced significant challenges in December 2024. The postal strike, coupled with weak demand and concerns about future trade policies, led to a contraction in activity. While the manufacturing sector showed resilience, the overall economic picture suggests a slowdown as we entered the new year. The Bank of Canada’s response to the growing economic slack will be crucial in the coming months.
