Yahoo Finance Corporate profits down in Canada in Q1
Belts continue to tighten across corporate Canada amid falling profits across a number of sectors, creating a slowdown in investment not seen since the 2009 recession.
Some economists expect profits to remain weak in the coming quarter as a result of volatile commodity prices, while others predict a "bounce back" a result of the depreciating loonie and steady comeback of the U.S. economy.
Statistics Canada data released Tuesday shows corporate profits fell 3.3 per cent in the first three months of the year compared to the same time last year, dragged down by the financial sector, mining and manufacturing.
“The effects of a low profit environment are being felt through other channels of the economy,” said TD economist Jonathan Bendiner, who noted that investment plans for 2013 grew by just 1.7 per cent, which is the slowest pace since 2009.
The picture was bleakest in the financial sector, where profits fell 4.7 per cent in the first quarter. That includes a 16-per-cent decrease from insurance companies – a drop of about $746 million. Earlier this month, Manulife Financial Corp., Canada's largest insurer, reported a lower first-quarter profit on weak insurance sales and higher expenses. It said profit fell to $540 million from $1.22 billion the year before.
Profit across the manufacturing sector fell 1 per cent to $12.1 billion, with 8 out of 13 industries reporting lower earnings in the January-March quarter, TD noted in its assessment of the StatsCan data.
In the mining industry, another key Canadian sector, profits fell 3.2 per cent in the first quarter – the third consecutive quarterly drop. The industry has been hit hard by a combination of rising costs and falling commodity prices. A handful of large mining companies have also taken huge writedowns on projects, many of which were picked up through mergers and acquisitions in recent years.
Profit gains in the first quarter came from the oil and gas extraction sector, which was up 28 per cent. TD noted that’s a reversal from the previous six quarters, where profits were down in that sector.
Overall, StatsCan showed corporate profits fell 1.2 per cent to $74 billion in the first quarter compared to the fourth quarter of 2012. That follows a 1.4-per-cent drop in profits in the October-December quarter as compared with the July to September period.
TD predicts profits will “bounce back” in the coming months as a result of the declining Canadian dollar, which will help industries that do a lot of business in the U.S. such as manufacturing.
“Our call for the Canadian dollar to depreciate over the course of 2013 combined with an anticipated pick-up in U.S. activity in the latter half of the year bodes well for the Canadian economy - especially for manufacturers,” Bendiner said.
He also cited the recent Bank of Canada business outlook that shows businesses expect modest growth in sales this year.
However, Capital Economics economist David Madani believes the falling profits will "hinder business investment," in the months ahead.
"Against the fragile global backdrop and the volatility of Canadian energy prices, business operating profits, which nudged lower in the first quarter of this year, are likely to remain under considerable pressure this year," Madani said in a note. "Under these circumstances, we expect growth in business investment and payroll employment to be fairly modest this year."
The Conference Board of Canada reported Tuesday that its consumer confidence index rose 5.1 points to 80.7 in May, erasing last month’s decline.
“The index moved higher thanks to a less pessimistic outlook for future job creation and a more positive attitude toward making major purchases,” the Conference Board of Canada noted.
However, it said the index still well below its base value of 100, “indicating that confidence is still low by historical standards.”
