Canada’s services sector shrinks for a fourth straight month as tariffs and Iran war weigh, PMI shows

Canada’s services economy contracted for a fourth consecutive month in September, as tariffs and the war involving Iran kept clients cautious, cut into export work and pushed up operating costs, S&P Global said Monday. Its Canada Services Business Activity Index rose to 48.3 from 46.8 in August, Reuters reported, but stayed below the 50 mark that separates growth from contraction. The improvement means activity and new business fell more slowly than they did in August, when the sector posted its steepest decline since February, according to Trading Economics.

“September once again proved to be a difficult month for businesses, with net reductions in output and new work both signalled,” said Paul Smith, economics director at S&P Global Market Intelligence. He said the declines were again closely tied to tariffs and the war in Iran, which created “a high degree of uncertainty, lower levels of export trade and operating expenses being raised to an uncomfortably high degree.”

Demand remained the weak spot. The survey’s new business index came in at 48.5, below 50 for a fifth straight month, and new export business fell at a steeper rate than in August, according to Reuters. Firms reduced staffing in response, a decline Trading Economics said was made worse by difficulty finding suitably skilled workers.

Costs are rising faster than firms can pass them on. The input price index rose to 62.2 from 61.7, as tariffs and elevated energy prices drove a sharper rise in operating expenses. Yet strong competition limited how much of that firms could pass on to clients, and output price inflation slowed to a seven-month low, Trading Economics reported. The one bright spot was sentiment: the future activity index jumped to 61.4 from 56.4, a five-month high, on hopes that uncertainty could ease. S&P Global’s Canada composite index edged up to 48.7 from 47.8 but was below 50 for a fourth month.

Factories are also losing momentum. S&P Global’s Canada manufacturing PMI, released Thursday, fell to a six-month low of 51.5 in September from 53.0, still signalling modest growth. New export orders declined for a fourth month on weaker demand from U.S. clients, and delivery delays were the most widespread since August 2022 as customs problems at the U.S. border, the Iran conflict and demand tied to artificial intelligence strained supply chains, Trading Economics reported. Input-cost inflation reached its highest level since mid-2022, and manufacturers’ confidence fell to its lowest since December 2025.

The trade backdrop keeps getting harder. Canada and the United States have exchanged rounds of counter-tariffs since early 2025, and a U.S. import ban on many Canadian alcoholic beverages, motorcycles and dairy products took effect last week, Reuters noted. Statistics Canada’s most recent Labour Force Survey showed employment fell by 42,000 in August, with the unemployment rate unchanged at 6.4 per cent. In the 12 months to August, the layoff rate averaged 0.9 per cent in industries that depend on U.S. demand for exports, compared with 0.7 per cent elsewhere. September jobs data are due Friday, Oct. 9.

The soft readings arrive as bond markets press the Bank of Canada. KPMG Canada chief economist Ali Jaffery now expects a 25-basis-point hike at the Dec. 9 decision, which would lift the policy rate to 2.5 per cent, the Financial Post reported. Economists at Bank of Nova Scotia, UBS, Manulife and Oxford Economics are predicting an increase at the Oct. 28 meeting. The five-year Government of Canada bond yield was nearing four per cent on Monday, almost 100 basis points higher than a year earlier, the Post said.

Jaffery said there was merit in the central bank “feeding the beast with one performative hike” before moving back into wait-and-see mode, calling it “the most reasonable compromise at this point, given the nascent economic recovery and elevated trade tensions.” Karl Schamotta, chief market strategist at Corpay, said yields were tracking oil prices “far more closely” than inflation.

Markets took the data in stride. The S&P/TSX composite index was up 15.90 points at 35,518.55 late Monday afternoon, helped by technology stocks, while the Canadian dollar traded at 70.16 cents US, down from 70.20 cents US on Friday, The Canadian Press reported. The November crude contract fell US$1.68 to US$89.43 a barrel.

Sources: Reuters; Trading Economics (services PMI); Trading Economics (manufacturing PMI); Statistics Canada; Financial Post; BNN Bloomberg / The Canadian Press.