Canada’s manufacturing sector contracted for the eighth consecutive month in September 2025, with the S&P Global Canada Manufacturing PMI falling to 47.7 as tariffs and economic uncertainty continued to dampen demand. The reading marked a faster deterioration from August’s 48.3 and remained firmly below the 50.0 threshold that separates expansion from contraction, signaling ongoing challenges for the nation’s industrial base.
Steepest Decline in Output and Orders Since Early 2025
Manufacturing production and new orders both contracted at accelerated rates during September, extending what has now become an eight-month downturn. The S&P Global Canada Manufacturing PMI report showed particularly sharp declines in export orders, with companies consistently citing tariffs and economic uncertainty as primary drivers. This marks the longest continuous contraction period since the 2020 pandemic disruptions, though the current decline remains less severe than that crisis period.
Paul Smith, Economics Director at S&P Global Market Intelligence, noted that “output, new orders and exports all continued to fall, with the uncertain trading environment also leading firms to make cuts to purchasing, inventories and employment.” The manufacturing sector’s performance has now underperformed for most of 2025, creating concerns about broader economic impacts. According to Statistics Canada data, manufacturing represents approximately 10% of Canada’s GDP and employs over 1.7 million workers, making the extended downturn significant for the national economy.
Tariffs and US Trade Relations Dominate Manufacturer Concerns
Canadian manufacturers reported that tariffs continued to severely impact export performance, with sales to the United States showing particular weakness. The Canada-United States-Mexico Agreement (CUSMA) framework, while maintaining trade flows, has not prevented additional tariff measures from affecting specific sectors. Survey participants consistently identified trade relations with the United States as their dominant concern, noting detrimental impacts on both export volumes and business confidence.
“Once again tariffs and Canada’s trading relationship with the United States remained a dominant theme amongst survey participants,” Smith emphasized in the press statement. The PMI report indicated that firms are adopting a “wait-and-see attitude rather than plan for and commit to new projects” due to the uncertain trade environment. This cautious approach has led to reduced capital investment and hiring freezes across multiple manufacturing subsectors, from automotive parts to industrial machinery.
Employment and Inventory Strategies Reflect Prolonged Uncertainty
Manufacturing employment declined for the eighth straight month in September, though the rate of job losses moderated to the softest pace since February. Companies primarily achieved workforce reductions through natural attrition rather than widespread layoffs, choosing not to replace departing employees while implementing selective workforce adjustments where necessary. The Project Management Institute’s 2025 manufacturing trends report suggests this pattern reflects industry expectations of a prolonged adjustment period rather than a sudden collapse.
Inventory strategies also shifted significantly, with manufacturers cutting both pre-production and finished goods stocks in response to weak demand. Purchasing activity declined solidly, though at the weakest rate since January, suggesting some stabilization in input buying patterns. Backlogs of work fell steeply, extending the current period of declining outstanding business to comfortably above three years, indicating sufficient production capacity across most manufacturing sectors. The Innovation, Science and Economic Development Canada has noted that manufacturing capacity utilization has declined steadily throughout 2025, though specific sector performance varies considerably.
Price Pressures Moderate Amid Competitive Market Conditions
While input costs continued to rise sharply in September, the rate of increase slowed significantly from previous months, providing some relief to manufacturers’ margin pressures. Selling prices increased only modestly, reflecting intense competitive pressures and challenging market conditions. This moderation in inflation metrics suggests that manufacturing sector weakness is contributing to broader disinflationary trends in the Canadian economy.
The Bank of Canada’s recent analysis of sectoral inflation trends has noted that manufacturing price pressures have eased faster than in services sectors, potentially influencing monetary policy considerations. With manufacturing representing a significant component of Canada’s export economy, the sector’s pricing dynamics have implications for both the Canadian dollar’s exchange rate and the country’s trade balance. The combination of softer demand and increased global competition has created what many manufacturers describe as the most challenging pricing environment since 2020.
References:
