Canada's services sector, which makes up two-thirds of the country's output, experienced another month of decline in December. Sales have fallen for the fifth consecutive month, marking the largest decrease in about three years.
The S&P Global Canada Services Purchasing Managers Index (PMI) remained largely unchanged in December, coming in at 44.6 compared to 44.5 in November. Any reading below 50 indicates a decline in activity, and this is the seventh consecutive month that the index has been below 50.
According to Paul Smith, the Economics Director at S&P Global Market Intelligence, "many" of the survey respondents reported subdued demand. Clients are hesitant to commit to new sales, which has contributed to the decline. Several companies also cited high interest rates as a factor weighing on demand.
Earlier in the week, S&P Global Canada released the December PMI for manufacturing, indicating the eighth straight decline and the lowest level since May 2020.
The Canadian economy shrank in the third quarter with an annualized rate of 1.1% decline. Weak growth is expected to continue into the fourth quarter of 2023 and the first half of 2024. In December, the Bank of Canada decided to hold its policy rate steady at 5% due to the weakening economic outlook. However, it is anticipated that the central bank may begin cutting rates as early as the second quarter.
Despite the overall negative outlook, the S&P Services PMI report suggests that companies remain hopeful about future growth prospects. Sentiment is at its highest level since April, with firms confident that interest rates will be cut, resulting in increased activity and demand.
