Canadian manufacturing activity reached its strongest level in four years last month, driven by domestic demand that offset weak international orders, according to data released Tuesday.

The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) rose to 53.5 in July, the highest reading since June 2022, supported by improvements in output and new orders. This marks the fourth consecutive month above the 50.0 threshold that separates expansion from contraction, following June's reading of 53.0.

Paul Smith, economics director at S&P Global Market Intelligence, noted that Canadian manufacturers were encouraged to boost hiring, increasing staffing levels to build capacity and manage current workloads. However, Smith expressed doubts about whether the growth pace can be sustained.

"International demand remains weak, weighed down by tariffs and a highly uncertain geopolitical environment. These factors continue to drive rapid price increases while exacerbating persistent and widespread supply-side disruptions," he said.

Input price inflation accelerated again in July, extending an upward trend that began in late 2025 and hitting a four-year high. S&P Global reported that companies noted price increases for various inputs, but cited tariffs and the Middle East conflict as root causes, with higher costs for energy, transportation, and steel widely mentioned as core drivers of overall inflation.

The domestic market was the primary source of growth, while new export orders declined for the second consecutive month. S&P Global noted that tariffs and the Middle East war were again reported to have negatively impacted international demand. Supply-side shortages and delivery delays were also widely mentioned by survey respondents, with reports indicating longer typical supplier delivery times.

Increased demand exacerbated supply chain tightness and price pressures, with manufacturers' purchasing activity growing for the fourth consecutive month. S&P Global said manufacturers raised their own product prices in response to rising costs. The survey found some companies concerned that price increases over the next year and volatile, unpredictable geopolitical conditions would adversely affect business performance.

Despite hopes that recent positive trends in sales and production would continue, the confidence index fell to a four-month low in July. Manufacturer inventories increased for the second straight month, with a modest rise that was still the largest since late 2024.

Canada's economy is on track for stronger-than-expected growth in the second quarter, rebounding after two consecutive quarters of GDP contraction. Following gains of 0.3% in May and 0.6% in April, June GDP is estimated to rise 0.2%, indicating an annualized growth rate of 3.4% for the most recent quarter. This would be the strongest expansion since the first quarter of 2023 and a further sign the economy is gradually absorbing the tariff and trade uncertainties brought by the Trump administration.

However, economists also warn that risks remain, including renewed conflict in the Middle East and President Trump's recent threats to impose new tariffs on Canadian goods, which could present headwinds for the economy.