UPDATE 1-Canada's Ivey PMI hits 2-1/2 year low as firms slash inventories

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TORONTO, Jan 6 (Reuters) - Canadian economic activity contracted in December at the sharpest pace since the early stages of the COVID-19 pandemic as firms worked to reduce their stock of inventories, Ivey Purchasing Managers Index (PMI) data showed on Friday.

The seasonally adjusted PMI fell to 33.4 last month from 51.4 in November, its lowest level since April 2020 and well below the 50 threshold that indicates a decrease in activity.

The Ivey PMI measures the month to month variation in economic activity as indicated by a panel of purchasing managers from across Canada.

The gauge of employment fell to an adjusted 49.8 from 54.3 in November, while the inventories index was at 43.5, down from 48.0.

It was the seventh straight month of declines for the inventories measure after peaking at 69.8 in May last year.

Higher interest rates likely increase the cost of financing inventories, while demand for goods could weaken if the economy slows as many economists expect.

The unadjusted PMI fell to 40.6 from 51.5.

(Reporting by Fergal Smith; editing by David Evans)

((fergal.smith@thomsonreuters.com; +1 647 480 7446))