Canada's manufacturing sector posted its strongest performance in more than three years during July, according to the latest S&P Global Manufacturing PMI, with output and new orders both accelerating and employment rising for a fourth consecutive month. PMI readings above 50 signal expansion in the sector.

The headline PMI reading marked the highest level since June 2022 and represented the fourth straight month of expansion.

Domestic Demand Drives Growth

The expansion appears largely domestically driven. New export orders declined for a second consecutive month, with survey panellists again citing tariffs and the conflict in the Middle East as factors weighing on international demand. The persistence of falling export orders despite the Canadian dollar trading near a four-year low against the U.S. dollar — a level that would normally make Canadian goods cheaper for foreign buyers — underscores the severity of the external headwinds facing exporters. Canada's internal market has remained resilient.

Input Prices Surge to Four-Year High

The inflation picture presented a significant concern. Input costs rose at the fastest pace in four years, continuing an upward trend that began in late 2025. Companies identified energy, transportation, and steel as the primary cost drivers, with tariffs and Middle East instability cited as root causes. Canada has been progressively restricting imported steel, tightening domestic supply of a key production input.

Manufacturers passed a portion of those higher costs along to customers. Output charges rose strongly and above historical trend, though they remained below the near four-year high recorded in May.

Vendor delivery times deteriorated markedly again in July. There were also signs that firms are purchasing materials ahead of need to build inventory, with stock levels rising at the steepest pace since the end of 2024. Such precautionary buying can itself amplify supply-chain pressures.

Business Confidence Declines

Despite the robust headline reading, business confidence in the outlook fell to a four-month low and remains well below the long-run trend.

Paul Smith, Economics Director at S&P Global Market Intelligence, said:

"PMI data for July painted a positive picture of current growth, with output and new orders both rising at faster rates on the back of firmer domestic demand. Companies were suitably encouraged to take on additional workers, raising their staffing levels to bolster capacity and help support current workloads."

"However, whether growth can be sustained at its current clip is doubtful. International demand remains weak, driven lower by tariffs and a highly uncertain geopolitical environment. These factors also continued to push up prices rapidly whilst adding to ongoing and widespread supply-side disruption. Subsequently, confidence amongst firms in the outlook and therefore near-term growth prospects — remains subdued, with sentiment in July its lowest for four months and well below trend."

Implications for the Bank of Canada

The report is a low-tier but notable data point for the Bank of Canada. It shows four consecutive months of manufacturing expansion alongside a four-year high in input costs — a combination unlikely to dampen discussion of potential rate increases. The divergent signals of strengthening growth, softening export demand, and intensifying cost pressures will be weighed alongside upcoming labour, GDP, and inflation releases that carry greater weight in the central bank's policy deliberations.