Canada's services PMI declines in June as trade policy uncertainty clips activity

Canada's services economy contracted more steeply in June, with the S&P Global Services PMI falling to 44.3, marking its seventh consecutive month of decline below 50. This deepening contraction is primarily attributed to uncertainty from U.S. trade policies, which has significantly impacted international demand and subdued the future outlook. The report also highlighted increased operating costs, pushing selling prices higher, and a broader economic downturn reflected in the Composite PMI and manufacturing activity.

Analysis

The Canadian economy is exhibiting clear signs of a deepening, broad-based slowdown, with the services sector contraction accelerating in June. The S&P Global Services PMI fell to 44.3 from 45.6 in May, marking the seventh consecutive month of decline and indicating a worsening business climate. This downturn is primarily attributed to uncertainty surrounding U.S. trade policy, which has severely dampened activity and international demand, given that 75% of Canada's exports are directed to the United States. The weakness is not isolated; the Composite PMI also dropped to 44.0, and manufacturing activity continued its decline. Forward-looking sentiment is deteriorating, with the Future Activity Index falling to its lowest level since March. Concurrently, the economy is facing stagflationary pressures, as rising operating costs, evidenced by the Input Prices Index reaching its highest point since October 2022, are forcing firms to increase selling prices despite the challenging demand environment. Labor market data corroborates this uncertainty, with hiring skewed towards part-time roles.

Key Decisions for Investors

• Investors should adopt a cautious stance towards Canadian-centric assets, as the synchronized downturn in both services and manufacturing PMIs points to significant headwinds for corporate earnings and the Canadian dollar.
• Consider underweighting sectors highly sensitive to U.S. trade and discretionary spending, such as industrials and non-essential services, until there is greater clarity on the trade negotiations, with the July 21 deadline being a key near-term catalyst.
• The combination of contracting activity and rising input costs warrants a focus on companies with strong pricing power that can protect margins, while avoiding firms with high operating leverage that are vulnerable to the current stagflationary environment.