Services show contraction for the third month in a row
The release of the S&P Global Canada Services PMI for January 2026 presents a challenging start to the year for the broader economy. While the manufacturing sector showed early signs of stabilization this month, the service sector, which accounts for the vast majority of Canadian employment, saw its downturn deepen. The headline Business Activity Index fell to 45.8 from 46.5 in December, marking the third consecutive monthly decline and signaling that the service-based labor market is under increasing pressure.
Deepening Contraction in Demand
The primary driver behind this deterioration is a persistent slump in new business volumes, which have now contracted for 14 consecutive months. Service providers across the country are reporting that clients are increasingly reluctant to commit to new contracts, largely due to high borrowing costs and the pervasive uncertainty surrounding international trade and tariffs.
For the staffing industry, this persistent "demand gap" is a critical indicator. Unlike manufacturing, where backlogs are beginning to stabilize, service sector backlogs are declining at an accelerated rate. This suggests that service-based firms are currently operating with significant spare capacity, reducing the immediate need for new hiring or even the replacement of departing staff.
Labor Market Impact: The Attrition Strategy
Employment in the service sector fell for the fifth consecutive month in January. However, the nature of these job losses remains relatively controlled. Rather than widespread layoffs, most firms are continuing to manage headcount through "passive" measures, such as hiring freezes and not filling vacancies left by natural attrition.
This creates a distinct environment for recruitment professionals:
• Permanent Placements: Demand for permanent staff in general services (hospitality, retail, and administrative support) remains at a cyclical low.
• Sectoral Shifts: Growth is increasingly concentrated in essential services and highly specialized niches, while "discretionary" service sectors like arts, entertainment, and wholesale trade are bearing the brunt of the contraction.
• Geography of Opportunity: As trade uncertainty weighs on firms with international exposure, domestic-focused service providers are proving slightly more resilient, though they remain cautious.
The Silver Lining: Easing Inflationary Pressures
One of the few positive takeaways from the January report is the continued cooling of input costs. Input price inflation fell to its lowest level since September 2024, as a combination of lower demand and increased competition among vendors limited the ability of suppliers to raise prices.
For employers, this easing of cost pressure provides a small amount of breathing room. While wage growth remains a factor, the overall slowdown in operating expenses may eventually allow firms to stabilize their margins without resorting to more aggressive labor cuts. If this trend continues, it could set the stage for a hiring recovery later in 2026, provided that trade tensions ease and consumer confidence returns.
Outlook for the Staffing Sector
The January Services PMI confirms that the "cooling" phase of the Canadian labor market is still in effect. For staffing firms, the coming months will require a strategic focus on efficiency and specialization. As general service hiring remains subdued, the most successful agencies will be those that can identify "pockets of resilience" such as healthcare-related services or specialized technical support while helping clients navigate the transition toward a leaner, more agile workforce.
While business confidence for the year ahead remains technically positive, it has softened since December. The "rebound" that many hoped for at the start of 2026 has been delayed by macroeconomic headwinds, suggesting that a consultative, data-driven approach will be essential for recruiters navigating this extended downturn.