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Canadian manufacturing activity contracted for a second straight month in September as higher borrowing costs and an uncertain economic outlook contributed to a drop in new orders, but the pace of decline lessened, data showed on Monday.

The S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 49.8 in September after falling to 48.7 in August, its lowest level since June 2020. A reading below 50 shows contraction in the sector.

“Output and new orders continued to fall with the sector still feeling the repercussions of material shortages and delivery delays,” Shreeya Patel, an economist at S&P Global, said in a statement.

“Demand was once again hit by client hesitancy in the wake of rising interest rates and weak macroeconomic conditions.”

Prospects for the global economy have weakened in recent months as war rages in Ukraine and central banks hike interest rates aggressively to tackle inflation.

The Bank of Canada has increased its benchmark rate by 300 basis points since March to a 14-year high of 3.25 per cent.

“Anecdotal evidence suggested that Canadian companies feared a recession which had led firms to re-evaluate their growth projections,” Patel said.

The future output index dipped to 59.2 in September from 61.0 in August, its lowest level since May 2020, while the measure of employment was below the 50 threshold for the second straight month.

More encouraging, was signs of easing inflation pressures. The output and input price indexes both fell to the lowest levels since November 2020.