Services sector still subdued although slightly better as sporting events are expected

The latest economic data for February 2026 suggests that the Canadian service sector is navigating a persistent, though slightly moderating, downturn. While manufacturing has shown signs of stabilization, the services industry (a critical driver of the national economy) remains in contraction territory. The S&P Global Canada Services PMI rose to 46.5 in February from 45.8 in January. Although this upward movement indicates that the pace of decline is slowing, any reading below the 50.0 threshold signifies a contraction, marking the fourth consecutive month of shrinking activity for the sector.

A Climate of Cautious Demand

The primary headwind for service providers remains a marked lack of new business. New orders have now declined for 15 consecutive months, driven by a mixture of subdued domestic demand and a significant drop in export business. Businesses report that clients are increasingly hesitant to commit to new contracts, often citing broader economic uncertainty and the impact of trade tensions. This cautious atmosphere has prevented the sector from finding a firm floor, even as the rate of decline in new work reached its weakest level since last October.

Despite the prevailing gloom, business confidence edged up to its highest level since late 2025. This optimism is partly fueled by anticipated spikes in tourism related to upcoming major sporting events hosted in Canada (think FIFA World Cup). However, this forward-looking sentiment has yet to translate into operational expansion, as the current reality remains defined by managing existing backlogs rather than processing a surge of new business.

Implications for the Labour Market

The sustained contraction in the services sector is having a direct and measurable impact on the Canadian labour market, characterized by a "low-hire, high-caution" environment. Several key trends have emerged from the February data:

Persistent Headcount Reductions: For the sixth consecutive month, employment in the service sector has declined. Companies are primarily managing this through the non-replacement of departing staff, though some firms have been forced to implement active layoffs to align their capacity with lower demand levels.
Sectoral Divergence: A growing gap is appearing between services and manufacturing. While services shed jobs, the manufacturing sector saw its fastest rise in staffing levels in over a year this February, driven by a recovery in domestic industrial demand. This creates a fragmented market where technical and industrial talent remains in demand even as service roles remain under pressure.
Sticky Wage Pressures: Although overall input price inflation eased to its lowest level since September 2024, service providers continue to identify labour costs as a primary source of high operating expenses. The pressure to maintain competitive wages in a tight talent pool (despite falling demand) continues to squeeze margins and limit the appetite for new hiring.

Macroeconomic Outlook

The cooling of the service sector provides the Bank of Canada with a complex set of signals. On one hand, the easing of cost inflation and the weakness in service activity support the case for further interest rate cuts to stimulate growth. On the other hand, the resilience of the manufacturing sector and persistent wage pressures suggest that the economy is not in a uniform state of distress.

For the staffing industry, the current landscape requires a pivot toward high-growth pockets like industrial production and "smart manufacturing," where investment in automation is driving a need for technically proficient workers. Until the services sector can break its 15-month streak of falling orders, the broader labour market is likely to remain characterized by intense competition for fewer vacancies and a focus on essential-only hiring.