Canada’s services sector expanded for the second consecutive month in November, with the Purchasing Managers’ Index (PMI) reaching 51.2—its highest level since April 2023. This positive momentum is tempered by concerns over potential US trade policy changes that could affect Canada’s export-driven economy.
Promising Growth with Persistent Challenges
The services PMI climbing to 51.2 signals expansion in the sector, supported by increased staffing levels as the employment index reached a 14-month high. However, growth in new business remains modest, dipping slightly to 50.1, reflecting lingering concerns about the broader business climate.
Lower interest rates have provided some relief, with the Bank of Canada reducing rates to 3.75% since June. Despite these gains, uncertainties over proposed US trade measures, including a potential 25% tariff under the incoming Trump administration, pose risks to Canada’s economic outlook, particularly given the country’s reliance on the US market.
Manufacturing Sector Also Shows Strength
Canada’s manufacturing sector mirrored the services sector’s positive trend, with its PMI rising to 52.0. This growth further signals recovery across multiple sectors of the economy, although the looming threat of trade policy changes could dampen these gains.
Why This Matters
For Markets: Optimism with Caution
The rise in Canada’s services PMI is a positive indicator of economic growth, but investors and businesses should brace for potential volatility. Shifts in US trade policies, such as the proposed tariffs, could disrupt key export-dependent sectors, impacting both services and manufacturing industries.
The Bigger Picture: Diversification Is Key
The potential fallout from US trade policy changes underscores the need for Canada to diversify its export markets. A heavy reliance on the US economy leaves Canadian businesses vulnerable to external policy shifts, making strategic adjustments essential for long-term resilience.
As Canada’s economy continues to recover, policymakers and businesses alike must navigate these challenges carefully to sustain growth while mitigating the risks posed by external factors.
