Corporate profit margins are at their highest point in nearly three decades, propped up in part by a lower Canadian dollar and cheaper labour costs, a new report shows.
“By all measures, higher corporate profit margins are here to stay,” said Benjamin Tal, CIBC’s deputy chief economist and author of the report.
The bank said the average profit margin of all non-financial corporations grew to 8.2 per cent of sales in the fourth quarter of 2014. When the embattled energy sector is stripped out, profit margins are at 7.6 per cent, their highest in almost three decades.
It also noted the gap between non-energy profit margins and real GDP growth is “about as large as in any non-recessionary period in the past 25 years.”
CIBC said corporate profit margins have averaged about 5 per cent throughout recent history, but have increased to 6 per cent over the past decade.
Canada’s new economy
Tal cites a “fundamental structural shift” in the Canadian economy, which is boosting corporate margins.
“This shift has been driven by forces such as globalization, innovation, a lower cost of capital and high barriers to entry,” Tal says.
CIBC said profit margins have fallen in high-margin industries such as manufacturing, transportation, agriculture and forestry, and gained traction in low-margin sectors such as retail and construction.
“More recently, margins have also been elevated by softening labour costs and a sinking loonie, fueling the near-three-decade record high,” Tal says.
The Canadian dollar has depreciated by almost 25 per cent, and Tal estimates that is responsible for about a full percentage point increase in average profit margins since 2012.
Export sectors, such as agriculture and manufacturing, are the biggest beneficiaries, alongside a few others including forestry and transportation, the report notes.
Labour costs decline
Meantime, the pace of growth in labour costs dropped from 3.5 per cent in 2012 to 1 per cent in 2014.
“No less than one third of Canadian GDP last year was produced by sectors with falling labour unit costs,” Tal says.
United Steelworkers economist Erin Weir says lower labour costs aren’t something to cheer about.
He blames federal government policy decisions, such as the Temporary Foreign Worker Program, cuts to Employment Insurance, the “aggressive” use back-to-work legislation and the “onerous administrative requirements” being placed on unions during collective bargaining.
“To help employees negotiate a fair share of rising profit margins, policymakers should instead enact progressive labour laws,” which includes enabling more workers to form and join unions,” Weir said in an email to Yahoo! Finance.