Canada's services PMI edges up to 18-month high, operating costs accelerate?

By Fergal Smith

TORONTO, June 3 (Reuters) - Canada's services economy expanded at a modest pace in May as the Middle East conflict raised economic uncertainty and higher fuel prices contributed to the fastest increase in operating costs in four years, S&P ?Global's Canada services PMI data showed on Wednesday.

The headline Business Activity Index rose to 50.6 last month from 49.2 in April, marking the first move above the 50 threshold since October and the highest level since November 2024. A reading above 50 shows an expansion in activity.

"Canada's service sector experienced a net rise in activity during May, but growth was fragile and masked a challenging business environment," Paul Smith, economics director at S&P Global Market Intelligence, said in a statement.

"Companies reported that new business fell marginally as clients expressed a high degree of uncertainty in the outlook, largely due to the ongoing crisis in the Middle East."

The war has effectively ?shut down the Strait of Hormuz, a vital global supply route for oil and liquefied natural gas.

The new business index fell to 49.8 from 50.3 in April and the measure of employment was at 49.2, down from 50.7.

"Cost pressures are lifting steeply higher, with firms not only reporting sharply rising fuel prices, but also higher wage expenses," Smith said. "That will raise red flags for policymakers who will be alert to the emergence of second-round price effects." The Bank of Canada has said it might have to respond with consecutive interest rate hikes if oil prices stay high and begin to push up inflation.

The input prices index climbed to 67.0 from 60.9, marking its highest level since May 2022. At 56.7, the prices charged measure was at its highest level since July 2023.

The S&P Global Canada Composite PMI rose to 50.8 last month from 49.9 in April as output increased in both the service and manufacturing sectors. Data on Monday showed that the S&P Global Canada Manufacturing PMI edged down to 52.9 from 53.3 in April as the potential for higher prices and product shortages due to the war likely boosted client demand. (Reporting by Fergal Smith; Editing by Chizu Nomiyama )