Canada’s services sector experienced another downturn in March, marking the fifth consecutive month of contraction. According to data from S&P Global, the decline is largely driven by global uncertainty, particularly linked to tensions in the Middle East, which have delayed client decision-making and reduced new business activity.
The Business Activity Index rose slightly to 47.2 in March from 46.5 in February. While this represents the highest level in five months, it remains below the neutral 50 threshold, indicating that the sector is still shrinking.
Weak Demand Continues to Weigh on Growth
New business volumes remain under pressure, extending a contraction trend for the 16th consecutive month. The New Business Index improved marginally to 47.7 from 46.9 in February, but demand continues to lag.
Businesses report that clients are postponing spending decisions due to economic uncertainty, which is directly impacting revenue growth across the services sector.
Global Pressures Impacting the Economy
Geopolitical tensions, especially the ongoing conflict in the Middle East, have pushed oil prices higher, contributing to increased global inflation risks. For Canadian companies, this has translated into higher operational costs, particularly in transportation and fuel.
In addition, Canada’s economy is facing challenges from U.S. sector-specific tariffs and uncertainty surrounding negotiations of the United States-Mexico-Canada Agreement (USMCA), which is scheduled for review before July 1.
Rising Costs Squeeze Businesses
Companies are reporting a sharp increase in expenses. The Input Prices Index surged to 62.3 in March, up from 57.1 in February, reaching its highest level since June.
Higher fuel and transportation costs are the main drivers of this increase, placing pressure on profit margins and limiting the ability of businesses to expand or invest.
Signs of Optimism Despite Challenges
Despite ongoing difficulties, there are some encouraging signs. The Future Activity Index rose to 61.9, its highest level in six months, suggesting that businesses expect conditions to improve.
However, the Composite PMI Output Index, which combines services and manufacturing, remained below 50 for the fifth straight month, at 47.6 in March. Meanwhile, the manufacturing sector showed signs of stagnation, with its PMI slipping to 50.0.
Conclusion
Canada’s services sector continues to face significant challenges due to global uncertainty, rising costs, and weak demand. While there are early signs of optimism in future expectations, the overall economic outlook remains cautious. A meaningful recovery will depend on improved global stability, easing cost pressures, and renewed business confidence. Until then, companies are likely to remain careful in their investment and expansion strategies.