Canada's services sector shrank for a second straight month in July even as the S&P Global PMI improved to 49.1, with input costs climbing at the second-fastest pace in more than three and a half years.
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Canada Services PMI Stays in Contraction as Costs Hit 3.5-Year High
Canada's services sector contracted for a second month in July as the S&P Global PMI rose to 49.1, still below the 50 threshold, while input costs climbed at the second-fastest pace in over three years.
"Latest PMI data point to another month of underwhelming service sector performance during July," Paul Smith, economics director at S&P Global Market Intelligence, said in a statement. "This was in line with a challenging business climate as tariffs and geopolitics continue to dominate both near-term activity and the outlook for the coming year."
New business volumes fell for a third straight month, and new export business contracted at the steepest pace of 2026 after the US announced tariffs on nearly $20 billion of Canadian goods last month. The Input Prices Index rose to 64.0 from 61.2 in June, with firms citing tariffs, higher energy and fuel costs tied to Middle East tensions, and rising labor expenses. Despite the weakness, services providers added staff at the strongest pace since May 2023.
The combination of contracting services activity and accelerating input costs presents a stagflationary signal for the Bank of Canada, which faces a tension between supporting growth and containing inflation. The contrast with manufacturing — where the PMI rose to 53.5, the highest since June 2022 — comes as Canada's economy is on track for annualized growth of 3.4 percent in the second quarter, the strongest since the first quarter of 2023.
The services survey showed confidence in the 12-month outlook remained positive overall but fell to its lowest level since June 2025, with companies split between hopes for an improving business climate and worries about continued geopolitical volatility and macroeconomic uncertainty.
The divergence between services and manufacturing is striking. S&P Global's manufacturing PMI rose to 53.5 last month from 53.0 in June, marking the fastest pace of expansion in more than four years, driven by stronger domestic demand that more than offset faltering international orders. The composite PMI, which blends both sectors, rose to 49.7 from 47.9 in June, still weighed down by the services decline.
Cost Pressures Complicate Bank of Canada's Path
For the Bank of Canada, the data presents a policy dilemma. Services firms continued to raise selling prices despite weak demand, a sign that inflationary pressures are proving sticky even as growth softens. Input prices rose at the second-highest pace in more than three and a half years, with companies pointing to increased energy, fuel and wage expenses.
The last time input costs climbed this quickly, in early 2023, the central bank was still in a tightening cycle, having raised its policy rate to a peak of 5 percent before holding through much of that year. The current backdrop differs — Canada's economy contracted for two straight quarters before rebounding — but the persistence of cost pressures could keep the Bank of Canada cautious about cutting rates even if growth looks soft.
Canada's economy is on track for stronger-than-expected growth in the second quarter. An estimated 0.2 percent rise in gross domestic product in June, following growth of 0.3 percent in May and 0.6 percent in April, points to annualized growth of 3.4 percent for the quarter, the strongest advance since the first quarter of 2023. Official data will be released at the end of this month.
If services activity continues to contract while input costs stay elevated, the Bank of Canada faces a choice between supporting a slowing domestic economy and containing inflation driven by external factors — tariffs and energy prices — largely outside its control. That tension is likely to keep rate decisions data-dependent through the remainder of the year.
This article is for informational purposes only and does not constitute investment advice.
[1] Canada Services PMI Improves in July Yet Remains in Contraction Territory - WSJ[2] Canada Services PMI Remains in Contraction — TradingView News[3] Canada Services PMI Improves in July Yet Remains in Contraction Territory[4] Canada’s Services Sector Shrinks Again, Even As PMI Improves - Finimize[5] Canada's services PMI edges up, but sector remains in ...
