Canada: Service Activity Hits Six-Month Low

13:58

The Canadian services sector significantly slowed down in August, impacted by rising trade tensions with the United States and geopolitical instability. The S&P Global PMI index fell below the growth threshold, while new orders and business outlooks deteriorated.

Services Shift into Contraction

The Canadian services economy experienced its steepest decline in August in six months. According to data released by S&P Global, the business activity index dropped to 46.8, down from 49.1 in July.

An index below 50 indicates a contraction in activity. The August figure marks the lowest level recorded since February, signaling a weakening demand in a sector crucial to the Canadian economy.

The slowdown was also reflected in new business. Its index fell from 48.4 to 46.1, reaching its lowest point since January.

Businesses Facing High Uncertainty

According to S&P Global, the decline in activity is largely attributed to the tense trading environment between Canada and the United States, as well as the repercussions of instability in the Middle East.

Businesses and their clients appear to be adopting a more cautious stance in light of this uncertainty. New business volumes are decreasing, and decisions regarding new contracts are being postponed.

"The underlying health of the services sector continues to suffer," noted Paul Smith, chief economist at S&P Global Market Intelligence, highlighting the impact of trade tensions and geopolitical conflicts.

U.S. Tariffs Weigh on Outlook

The economic climate has notably worsened following Washington's decision on August 22 to impose new tariffs of 50% on approximately $20 billion of Canadian imports.

This measure came after failed trade discussions between the two countries and adds to uncertainties for Canadian businesses exposed to trade with their main commercial partner.

In this context, the index measuring future activity fell to 56.4, down from 57.5 in July. This is its lowest level since June 2025.

Businesses remain generally confident in the possibility of medium-term improvement, but this confidence has significantly eroded.

Costs Remain Under Pressure

The slowdown in activity does not mean that inflationary pressures have disappeared.

Input prices remain high and above their usual trend, even though they have slightly decreased compared to July. Rising energy costs continue to weigh on businesses.

This combination—declining activity and still high costs—complicates the outlook for service businesses, which must simultaneously deal with weaker demand and significant expenses.

Manufacturing Sector Holds Up Better

The weakness in services contrasts with the situation observed in the Canadian manufacturing sector.

The S&P Global manufacturing PMI index, published a few days earlier, stood at 53.0 in August, down from 53.5 in July. It remains above the 50 threshold, indicating an expansion of activity for the fifth consecutive month.

However, this resilience is not enough to prevent the Canadian composite PMI index from declining. It fell from 49.7 to 47.8, its lowest level since March.

The latest data thus depicts a two-speed economy, with the manufacturing sector still expanding while services are more adversely affected by the effects of trade and geopolitical uncertainty.