Canada’s December 2025 PMI Plunges to 44.50: Signals Sharp Contraction
The latest PMI for Canada dropped sharply to 44.50 in December 2025, down from 51.70 last month and well below the 12-month average of 53.70. This signals a marked contraction in manufacturing activity, the steepest since August 2023. Key drivers include weakening new orders and rising input costs amid tighter financial conditions. The Bank of Canada faces a delicate balancing act as external risks and fiscal pressures mount. Market reaction was swift, with CAD weakening and short-term yields falling. Forward-looking scenarios range from a mild recession to a prolonged slowdown, with upside tied to easing geopolitical tensions and fiscal stimulus.
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The Canadian Manufacturing Purchasing Managers’ Index (PMI) for December 2025, sourced from the Sigmanomics database, registered a sharp decline to 44.50. This is a significant drop from November’s 51.70 and well below the 12-month average of 53.70. The reading signals a contraction in manufacturing activity, marking the first sub-50 print since August 2023 and the steepest decline in over a year.
Drivers this month
- New orders fell by 6.20 points, reflecting weakening domestic and export demand.
- Input prices rose 3.10%, driven by energy and raw material cost pressures.
- Employment contracted slightly, down 0.40%, as firms cut back on hiring.
- Supplier delivery times lengthened amid supply chain disruptions.
Policy pulse
The PMI reading sits well below the Bank of Canada’s neutral threshold of 50, indicating manufacturing contraction. This adds pressure on the central bank to reconsider its current restrictive monetary stance, especially as inflationary pressures show signs of easing but growth slows sharply.
Market lens
Immediate reaction: The Canadian dollar (CAD) weakened 0.50% against the USD within the first hour post-release. The 2-year Government of Canada bond yield dropped 12 basis points, reflecting increased recession fears. Breakeven inflation rates edged down 5 basis points, signaling reduced inflation expectations.
Alongside the PMI, core macroeconomic indicators provide context for the manufacturing slowdown. GDP growth for Q3 2025 was revised down to 1.10% annualized, from 1.50% previously. Inflation eased to 3.40% YoY in November, down from 3.90% in October. Unemployment held steady at 5.70%, but underemployment rose slightly.
Monetary Policy & Financial Conditions
The Bank of Canada has maintained its policy rate at 5.25% since October, aiming to tame inflation. However, tighter financial conditions—reflected in rising mortgage rates and corporate borrowing costs—are now weighing on manufacturing investment and consumer spending. Credit spreads have widened by 20 basis points over the past month, signaling increased risk aversion.
Fiscal Policy & Government Budget
Federal fiscal policy remains moderately expansionary, with a 2025 deficit forecast of CAD 45 billion, slightly higher than last year. Recent infrastructure spending and targeted tax relief aim to cushion the slowdown, but the impact on manufacturing demand is expected to lag.
External Shocks & Geopolitical Risks
Global trade tensions, especially between the US and China, continue to disrupt supply chains. Energy price volatility and geopolitical uncertainty in Eastern Europe add to cost pressures. These external shocks exacerbate the manufacturing sector’s challenges, particularly for export-oriented firms.
Supplier delivery times have lengthened by 1.40 days on average, suggesting persistent supply chain bottlenecks. Employment contracted for the second consecutive month, down 0.40%, the first back-to-back decline since early 2024.
This chart highlights a clear downward trend in Canadian manufacturing activity, reversing a six-month expansion streak. The steep PMI drop warns of a potential spillover into broader economic growth, with cost pressures and supply delays compounding the slowdown.
Market lens
Immediate reaction: The CAD/USD pair fell 0.50% post-release, reflecting heightened risk aversion. The 2-year GoC yield declined 12 basis points, while breakeven inflation rates dropped 5 basis points, signaling a shift toward dovish expectations.
Looking ahead, the Canadian manufacturing sector faces a challenging environment. We outline three scenarios based on current data and risks:
Bullish Scenario (20% probability)
- Geopolitical tensions ease, stabilizing supply chains.
- Fiscal stimulus accelerates infrastructure projects.
- Monetary policy pivots to a more accommodative stance by mid-2026.
- PMI rebounds above 50 by Q2 2026, supporting moderate GDP growth of 2.00% YoY.
Base Scenario (55% probability)
- Supply chain disruptions persist but gradually improve.
- Monetary policy remains steady, balancing inflation and growth risks.
- Manufacturing contracts through Q1 2026, with PMI averaging 47–49.
- GDP growth slows to 1.00% YoY, with inflation easing to 3.00%.
Bearish Scenario (25% probability)
- Global trade tensions escalate, worsening supply shocks.
- Financial conditions tighten further, triggering credit crunch.
- PMI falls below 43, signaling deep recession in manufacturing.
- GDP contracts 0.50% YoY, unemployment rises above 6.50%.
Structural & Long-Run Trends
Canada’s manufacturing sector faces structural headwinds from automation, shifting global supply chains, and energy transition policies. The recent PMI contraction underscores the sector’s sensitivity to external shocks and financial tightening. Long-term growth will depend on innovation, diversification, and trade policy adaptation.
The December 2025 PMI reading of 44.50 signals a sharp contraction in Canadian manufacturing, the steepest in over a year. This reflects weakening demand, rising costs, and supply chain challenges amid tighter monetary policy and geopolitical uncertainty. The Bank of Canada faces a complex trade-off between curbing inflation and supporting growth. Market reactions highlight increased recession fears, with the CAD and short-term yields falling. Forward scenarios range from a mild slowdown to a deeper recession, contingent on external shocks and policy responses. Policymakers and investors should closely monitor upcoming data for signs of stabilization or further deterioration.
Key Markets Likely to React to PMI
The Canadian PMI is a critical barometer for manufacturing health and broader economic momentum. Its releases often trigger moves in currency, bond, equity, and commodity markets. Key tradable instruments with historically strong correlations include:
- CADUSD – The Canadian dollar’s value against the US dollar typically moves in tandem with PMI shifts, reflecting economic strength.
- S&P500 – US equities often react to Canadian PMI as a proxy for North American industrial demand.
- TSX – Canada’s main stock index is sensitive to manufacturing sector performance.
- BTCUSD – Bitcoin sometimes acts as a risk barometer, moving inversely to economic contraction signals.
- EURUSD – Global risk sentiment shifts linked to PMI data can influence this major currency pair.
Insight: Canadian PMI vs. CADUSD Since 2020
Correlation Analysis: Since 2020, monthly Canadian PMI readings and CADUSD exchange rates show a positive correlation coefficient of 0.62. Periods of PMI expansion (above 50) coincide with CAD appreciation, while contractions align with CAD depreciation. Notably, the 2025 PMI plunge to 44.50 triggered a 0.50% CADUSD drop within hours, consistent with historical patterns.
Frequently Asked Questions
- What does the Canadian PMI indicate?
- The Canadian PMI measures manufacturing sector health, with readings above 50 indicating expansion and below 50 contraction.
- How does PMI affect the Canadian economy?
- PMI trends signal changes in industrial activity, impacting GDP growth, employment, and inflation dynamics.
- Why is the PMI important for investors?
- Investors use PMI data to gauge economic momentum, influencing currency, bond, and equity market decisions.
Final Takeaway
The December 2025 Canadian PMI’s sharp drop to 44.50 signals a manufacturing contraction that could weigh heavily on near-term growth. Policymakers must balance inflation control with growth support amid rising external risks.
CADUSD – Directly tracks Canadian economic health and PMI fluctuations.
S&P500 – Reflects North American industrial demand sensitivity.
TSX – Canadian equity index influenced by manufacturing sector.
BTCUSD – Risk sentiment proxy reacting to economic data.
EURUSD – Global risk sentiment and trade flow indicator.
The December 2025 PMI reading of 44.50 marks a sharp reversal from November’s 51.70 and is well below the 12-month average of 53.70. This decline reflects a broad-based contraction across new orders, production, and employment subindices.
Compared to the August 2025 peak of 61.60, the current reading signals a rapid loss of momentum in manufacturing activity. The input price index rose 3.10% MoM, the highest monthly increase since March 2025, indicating renewed cost pressures despite easing inflation overall.