Canada Manufacturing Rebounds, But Tariffs and Costs Bite

Canada's manufacturing sector showed signs of life in January, expanding for the first time in a year as business sentiment reached a three-month high. However, the positive momentum was tempered by persistent weakness in new orders and growing cost pressures fueled by trade tariffs.

The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) registered 50.4 in January, a notable increase from December's 48.6. A reading above the 50.0 threshold signals expansion, marking the index's best performance since it hit 51.6 in January of the previous year.

A Fragile Expansion Emerges

The January data indicates a potential turning point for Canadian manufacturers. Paul Smith, economics director at S&P Global Market Intelligence, noted that the sector "started the new year on a more positive footing."

Key drivers behind the improved PMI figure include:

• Stabilized Output: Production steadied after nearly a full year of continuous contraction.

• Renewed Hiring: The employment index rose to 50.6 from 48.7, reflecting marginal jobs growth for the first time in 12 months.

• Improved Confidence: Firms reported a better outlook, driven by expectations of economic growth this year.

• Inventory Growth: The stocks of purchases index climbed to 50.1 from 47.9 in December.

According to S&P Global, this growth was largely a result of companies clearing backlogs of work and introducing new products to the market.

New Orders and Exports Remain a Drag

Despite the headline expansion, underlying demand remains weak. The new orders index, while improving to 49.3 from 47.3, still indicated a contraction in new business.

Export performance was a significant concern, with the new export orders index at a low 44.6, up only slightly from 43.9 in December. This decline was attributed to sustained weakness in foreign demand, particularly from the United States. Manufacturers specifically cited that tariffs continued to negatively affect international trade.

Inflationary Pressures Mount

Cost inflation accelerated significantly in January, posing another major challenge. The input price index, a measure of inflation for manufacturers, jumped to 59.0 from 56.9 in the prior month, reaching a five-month high.

Tariffs were identified as a key driver behind the rising costs. In response, manufacturers increased their own selling prices at the fastest rate since March 2025, passing on the higher expenses to their customers.

Outlook: Resilience Clashes with Uncertainty

Experts view the current situation as a mix of resilience and significant risk. Smith described the latest survey data as pointing to an "underlying resilience in the manufacturing economy." However, he cautioned that "ongoing inflation and trade uncertainties seem set to remain dominant themes in 2026" and will be the "primary challenges to navigate."

This sentiment was echoed by Bank of Canada Governor Tiff Macklem, who recently highlighted the high level of uncertainty stemming from Trump's trade policy and other geopolitical risks. In an interview, he stated that he anticipated the potential for a new economic shock, underscoring the precarious environment facing Canadian manufacturers.