GROWTH IN CANADIAN CORPORATE PROFITABILITY EXPECTED TO SLOW IN THE SECOND HALF OF 2010
Ottawa Following a strong post-recession rebound, growth in Canadian corporate profitability is expected to moderate in the second half of the year, based on a new Conference Board of Canada indicator released for the first time yesterday.
The Leading Indicator of Industry Profitability, part of the Conference Board’s Industrial Economic Trends service, is designed to predict future movements in corporate profitability. A leading indicator is created for the economy as a whole, as well as for 49 sectors within the economy, covering most of the private business activity that takes place in Canada. External factors such as the fiscal problems in the eurozone or the state of the U.S. housing market are embedded into the analysis.
“Corporate profitability growth is now stabilizing following a sharp decline during the recession and a strong recovery coming out of the downturn. After falling by 37 per cent between the second half of 2008 and the first half of 2009, profits had increased by 28 per cent by the end of last year,” said Michael Burt, Associate Director, Industrial Economic Trends.
“Now that profitability is approaching more normal levels for many industries, the indicator suggests that there will be a significant slowdown in the rate of growth, reflecting the transition to a period of weak or no profit growth.”
Growth in the profitability leading indicator for all industries has been decelerating over the past few months, and the index actually decreased by 0.4 per cent in April, which is its first outright decline since March 2009. The rapid rise in the corporate prime interest rate and the decline of raw materials prices, when adjusted for seasonality, were the major factors explaining the reversal.
However, improving labour markets and renewed stock market growth are indicative of further increases in profitability in the second half of the year. The breadth of the recovery in profitability is also a reassuring indicator. Of the 49 industries covered by this survey, 37 recorded an increase in their index last month.
The strength of the Canadian dollar is daunting for many industries, but a boon to others. As the dollar gained more than five per cent in the last two months alone, the indicators deteriorated for many industries that are dependent on exports―such as pharmaceutical manufacturing, clothing and textiles manufacturing, vehicle manufacturers and other transportation equipment manufacturing. However, the leading indicator improved for industries that rely on imports for product and components―such as computer and electronic product manufacturing, and most retailers.