Highlights:

  • The Canada Markit manufacturing PMI index fell to at least a 9 1/2 year low in March (46.1)
  • US manufacturing also contracted slightly, with worse yet to come
  • Service-sector downturn likely significantly larger in March
  • Glimmers of light at the end of the tunnel from China data

The Canada Markit manufacturing PMI fell to at least a 9 1/2 year low in March, and although arguably better than feared at 46.1, it still tipped firmly below the break-even 50 level indicating a decline in activity. The reality is that will get worse in the near-term. Unlike most economic downturns, the pullback this time around is being led by service-sector disruptions resulting from social/physical distancing. Those shutdowns already impacted manufacturing output in March via both demand reductions, including from Canada’s hard-hit energy sector, and disruptions to global supply chains but the impact will be larger in April. The US ISM manufacturing index also out this morning was better than feared, but will certainly deteriorate further. And that has obvious implications for Canada given tight cross-border industrial integration.

The service-sector pullback has almost certainly been far more pronounced than for manufacturing – in line with the earlier experience in China where service-sector weakness significantly outstripped the pullback in the normally more volatile manufacturing sector. But China’s March reports also provide a glimmer of light at the end of the tunnel. China’s experience with the COVID-19 outbreak has been running ahead of the rest of the world. Dramatic measures there to curb the spread of the virus in January and February weighed heavily on output, but the virus was ultimately brought under control and activity has started to resume. China’s Markit PMI manufacturing measure actually bounced back to just slightly above 50 in March – and earlier indicators suggest service-sector activity also started to recover. That will not necessarily last given the dramatic pullback in global demand over just the last several weeks. And a level of 50 really just means that activity is no longer contracting. But the bounce-back does serve as a reminder that there is a path out of this downturn as the virus is brought under control, even if it will take time to get there.

 

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States

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