By Fergal Smith

TORONTO Contraction in Canada's manufacturing sector deepened slightly in June as an uncertain economic outlook weighed on both domestic and foreign demand, data showed on Tuesday.

The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) dipped to a seasonally adjusted 48.8 in June from 49.0 in May. A reading below 50 indicates contraction in the sector.

"Reports of subdued market demand, both at home and abroad, were widespread, with clients reportedly hanging back from committing to new business given the uncertain economic outlook," Paul Smith, economics director at S&P Global Market Intelligence, said in a statement.

The new orders index edged lower, to 48.5 from 48.6 in May, while the measure of new export orders was in contraction for the 13th straight month.

High interest rates contributed to the postponement of spending decisions, manufacturers said.

The Bank of Canada last month raised its benchmark interest rate to a 22-year high of 4.75%.

As demand weakens, firms have moved to cut excess input inventory. The stocks of purchases index fell to 47.3 from 48.6 in May, its 11th straight month of contraction.

In an encouraging sign for inflation, a combination of reduced input buying and the easing of pandemic-related supply challenges led to a sharp improvement in the lead times for input delivery. The suppliers' delivery times index was at 51.8, up from 50.9 in May.

The improvement in vendor delivery times "has clearly helped to ensure that inflationary pressure remain under broad control," Smith said.

"However, with a lack of market demand the principal factor behind the shortening of lead times, it's hard to get away from the sense of subdued industrial performance heading into the second half of the year," Smith said.

(Reporting by Fergal Smith; Editing by Mark Porter)