Canadian service economy shrinks for seventh straight month

By Fergal Smith

TORONTO (Reuters) – Activity in Canada’s service sector deteriorated for a seventh consecutive month in December as elevated borrowing costs weighed on the housing market, S&P Global Canada services PMI data showed on Thursday.

The headline business activity index edged up to 44.6 in December from a near three-and-a-half-year low of 44.5 in November. However, it remained well below the 50 threshold which separates expansion from contraction in the sector. The index has been below 50 since June.

“The impact of tight monetary policy on Canada’s service sector economy was plain to see in December,” Paul Smith, economics director at S&P Global Market Intelligence, said in a statement.

“Panellists widely reported that ongoing weakness in demand and activity was in part being driven by high interest rates, with weakness notably seen in real estate markets.”

The Bank of Canada has raised interest rates to a 22-year high of 5% to tame inflation. The latest Canadian housing data shows sales down 43% in November from their peak in the first quarter of 2021.

The PMI’s measure of new business fell to a three-year low of 45.3 from 45.5 in November, while new export business also showed a deeper contraction.

Signs of cooling inflation pressures were a bright spot in the data. The prices charged index dipped to 52.9 from 53.7 in November, posting its lowest level since August 2021, while the input prices index was at 58.7, down from 60.0.

The S&P Global Canada Composite PMI Output Index, which captures manufacturing as well as service sector activity, posted its lowest level in December since June 2020, dipping to 44.7 from 44.8 in November.

On Tuesday, data showed that Canada’s manufacturing PMI fell to 45.4 in December, marking the steepest pace of contraction for the factory sector since the early months of the COVID-19 pandemic.

(Reporting by Fergal Smith; Editing by Chizu Nomiyama)