MNI INTERVIEW:Canada PMI Hit By Weak CAD Amid Tariff, Slow GDP
MNI (OTTAWA) - The drop in Canada's Ivey PMI to the lowest since May 2020 last month was driven by a hit to suppliers from currency depreciation against the backdrop of an already-weak domestic economy and Donald Trump's tariff threats, the index's manager Fraser Johnson told MNI Thursday.
“The devaluation of the Canadian dollar, that probably has multiple effects. We see the Canadian economy decelerating faster than the U.S. economy for example, which is one the reasons why your interest rate is lower than in the U.S.,” said Johnson, who compiles the index and teaches supply chain management for the Ivey business school at Ontario's Western University. "It has an impact in terms of competitiveness of Canadian businesses, but it also raises prices.” (See: MNI INTERVIEW: Trump Canada Threats Amount To A 10% Tariff)
Exchange rate weakness “became more acute after the U.S. election," he added.
The Ivey PMI price index rose from 61.5 to 64.4, a two-year high. Canadian firms import a lot of materials and services Johnson said, costs boosted by the Canadian dollar's fading from CAD1.34 in late September to CAD1.45 at the end of January. The currency reached the lowest since 2003 in recent days before rebounding as Trump agreed to a 30-day delay on tariffs of 25% on all products except energy at 10%.
“We actually have a trade deficit with the U.S. if you take a look at everything that excludes oil,” Johnson said. “That’s why he (Trump) blinked on Monday, quite frankly, because he recognized what the impact would be, it would devastate the North American automotive industry if he imposed those tariffs.” Canada's resources minister this week said a trade war would boost the cost of Americans purchasing a new car by an average of USD2,000.
Ivey's headline PMI declined to 47.1 in January from December's 54.7, the first reading since August below the 50-mark that separates expansion and contraction. While below the 12-month moving average, this reading is better compared to other weak spots since the pandemic rebound than to the slump seen in 2020, Johnson said.
One day before Canada reports January employment, the Ivey jobs index declined to 52.9 from 55.3. Rising unemployment is adding to economic slack and that's one reason the BOC has been cutting interest rates. (See: MNI INTERVIEW: BOC To Cut Faster And Deeper In Trade War)