The profitability of Canadian companies remained strong overall at least until the end of 2007, despite concerns about the economic storm clouds gathering just south of the border. Is the situation unique, and therefore sustainable, or an accident waiting to happen?
Total Canadian corporate profits were up 9.2 per cent in the four quarters ending in 2007Q4. This pace was far in excess of the economy's growth rate, which means that profits continued to rise as a share of total income.
The leading profit-growth sectors were arts and recreation (63 per cent), construction (26 per cent), retail trade (25 per cent) and real estate (19 per cent). In contrast, profits were falling in sectors like agriculture, forestry, fishing and hunting (-32 per cent overall), mining (minus six per cent), oil and gas (minus one per cent) and repair, maintenance and personal services (minus six per cent). Manufacturing profits were up 3.3 per cent.
Some of these results seem surprising, such as the strength in retail trade and weakness in mining and oil and gas, not to mention positive profit growth in manufacturing. But these data can be volatile, even when measured on a year-ago basis.
It is helpful to look at profit margins, which are much smoother. The profit margin for the economy as a whole was 8.9 per cent in 2007Q4, a very solid number. This number was as low as 3.3 per cent back in late 1992, in the aftermath of recession, but spent most of the 1990s in the six- to seven-per-cent range. In 2000 it drifted above seven per cent, faltered to 5.3 per cent in late 2001, but then recovered steadily. In 2005, the aggregate profit margin moved above eight per cent, and it has fluctuated in a narrow range between 8.5 per cent and nine per cent since that time.
One might suspect the oil and gas sector was behind this trend, but not so. Profitability in that sector peaked in 2005 and has been declining since. Even so, its five-year average profit margin is about 19 per cent, more than double the economy average. In fact, the uptrend in overall profitability is mainly due to mining, where the margin has more than doubled since 2001-02 to around 18 per cent.
As for manufacturing, its overall profit margin at the end of 2007 was 6.3 per cent, still in a range that has been typical for much of the past decade, except during the 2001-02 slowdown. Sub-sectors of rising profitability include non-metallic mineral products (15.8 per cent most recently), computers and electronics (10.7 per cent), and alcoholic beverages and tobacco products (25 per cent).
Many other manufacturing sub-sectors are being squeezed, including motor vehicles (-1.2 per cent, although parts manufacturers are still doing better overall, at 7.3 per cent), wood and paper (1.1 per cent), clothing and textiles (1.2 per cent).
The bottom line? So far, the profit damage from the U.S. slowdown has been limited to a few sectors. This puts extra weight behind the recent survey of investment intentions by Statistics Canada, which indicated that investment will be a positive for the Canadian economy in 2008.
(Stephen Poloz is a senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
