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The RBC Canadian Manufacturing Purchasing Managers' Index, released on Wednesday, slipped to 50.6 in January from 54.0 a month earlier. While above the 50-point mark that separates expansion from contraction, it was the weakest reading since the survey began in October 2010.
"Global economic uncertainty, particularly rooted in the euro zone, weighed heavily on the Canadian manufacturing sector in the first month of 2012," Craig Wright, chief economist at Royal Bank of Canada, said in a statement.
Canada's struggles were part of a global trend.
Crumbling demand also restrained factory output in Asia and most of Europe in January, business surveys in other markets showed.
Output among Canadian manufacturers slightly outpaced the increase in new orders, but both significantly lagged December totals. Slumping demand from abroad was a key contributor, with almost 20 percent of respondents reporting lower volumes of new export orders.
"Canada's modest recovery may be jeopardized if European policymakers fail to contain the sovereign debt crisis," noted Wright.
The survey's results were further evidence the Canadian economy is slowing. Data on Tuesday showed gross domestic product shrank by 0.1 percent in November, its first contraction since May.
The next major gauge of economic health will come on Friday with January's employment data, which is expected to show a slight rise in net new jobs over December totals, according to a Reuters poll of analysts.
The RBC PMI data revealed manufacturing sector jobs fell in January for the first time in the survey's 16-month history, mostly due to the slower rate of new order growth.
The European debt turmoil and choppy U.S. recovery have forced the Bank of Canada to keep its overnight target rate at 1 percent for a record 16 months now.
The median forecast in a Reuters poll was for the next rate hike to come in the first quarter of 2013, but traders are pricing in a small chance of a rate cut