Recent data from S&P Global reveals continued struggles in Canada's service sector in September, with the Services Purchasing Managers' Index (PMI) dropping to its lowest level in six months. This downturn has led to layoffs and a significant drop in new business, hitting a nearly four-year low. The overall business activity index decreased from 47.8 in August to 46.4 in September, the lowest since March. A PMI below 50 indicates contraction in business activity.
Paul Smith, Economics Director at S&P Global Market Intelligence, highlighted that the substantial decline in business activity and new orders contributed to the second consecutive month of layoffs. Specifically, the new business index dropped from 47.6 in August to 44.7, the lowest since December 2020. The employment index fell from 49.4 to 47.7, reflecting labor market weakness.
This weakening labor market, alongside slowing inflation and reduced output, provides the Bank of Canada with justification for more relaxed monetary policies. Businesses broadly anticipate further interest rate cuts in the coming months, which is seen as key to boosting future sales and business activities.
Despite the overall economic slowdown, the market remains optimistic about the future. The Future Activity Index rose to 62.7, the highest in six months, indicating strong business confidence.
Investors expect the Bank of Canada to reduce the benchmark interest rate by 0.75 percentage points by year-end, aligning with the easing measures since June. The current policy rate stands at 4.25%.
The S&P Global Canada Composite PMI Output Index, which measures both manufacturing and services, decreased from 47.8 in August to 47.0 in September. Notably, Tuesday's data showed the Canadian Manufacturing PMI reached 50.4 in September, marking the first time in 17 months it surpassed 50, indicating stabilization in the sector.
