Canada's services sector remained in contraction for a fourth consecutive month in September, according to the latest S&P Global Canada Services PMI. The index rose to 48.3 from 46.8 in August, but any reading below 50 signals that activity is still shrinking. The improvement suggests the downturn is easing, but it is far from a recovery.
The services PMI is a monthly survey of purchasing managers at services companies, covering everything from restaurants and banks to software firms and transport providers. A reading above 50 means the sector is expanding; below 50 means it is contracting. The index has now stayed below that threshold since June, pointing to persistent weakness in a part of the economy that accounts for the bulk of Canadian jobs and output.
What's behind the continued decline?
S&P Global Market Intelligence economist Paul Smith said the latest data show softer output and fewer new orders. He pointed to two main culprits: the ongoing tariff dispute between the US and Canada, and the conflict in Iran. Both have weighed on trade flows and pushed operating expenses higher.
The input price index, which tracks what companies pay for materials, wages, and other costs, rose to 62.2 from 61.7. That is a high reading, indicating that cost pressures are not just persisting but intensifying. Meanwhile, new business remained below 50, meaning demand is still weak.
There is a sliver of good news: confidence improved. The future activity index jumped to 61.4 from 56.4, suggesting firms expect some of the uncertainty to fade in the months ahead. That optimism, however, has not yet translated into actual orders or output.
What it means for investors
For markets, the combination of a sub-50 PMI and rising input costs sends a mixed signal. A contracting services sector typically points to weaker demand and slower revenue growth, which could push the Bank of Canada toward cutting interest rates sooner. Lower rates would make borrowing cheaper and could support stocks, especially in rate-sensitive sectors like real estate and consumer discretionary.
But the input price reading in the 60s complicates that picture. It suggests service-sector inflation—often tied to wages and local suppliers—is still sticky. If companies can't pass those higher costs on to customers, their profit margins could get squeezed. That's a classic 'slow growth, stubborn costs' scenario, and it leaves the Bank of Canada in a tough spot: it wants to support growth, but it also needs to keep inflation under control.
For bond investors, this ambiguity means short-term yields and the Canadian dollar could stay volatile. Policy expectations are sensitive to any hint that the central bank might prioritize one goal over the other. Until either activity clearly stabilizes or cost pressures cool, traders may keep second-guessing the timing and pace of rate moves.
It's worth noting that Canada isn't alone in this pattern. Germany's services sector showed a rebound in September, while Italy's services growth cooled as input costs hit their highest since May. In Asia, Singapore's private sector growth eased to 58.1, and Japan's services sector also cooled. The global picture is one of uneven momentum, with cost pressures a common theme.
For everyday investors, the key takeaway is that the Canadian economy is still in a soft patch. If you hold Canadian stocks or bonds, keep an eye on the Bank of Canada's next moves and on any signs that inflation is easing. A clearer trend—either a sustained pickup in activity or a meaningful drop in costs—would give markets more direction. Until then, expect some choppiness.
