Corporate Canada profits down, with resources and manufacturing in biggest slump

Canadian corporate profits have declined in five of the past six quarters and are now 16 per cent below their post-recession peak in late 2011, according to a study released by TD Bank.

“This decline is not as bad as during the last recession, but it is approaching the performance Canadian firms saw during the U.S. downturn in 2000-2001,” TD economist Leslie Preston wrote.

Key export-driven sectors like manufacturing and resources have seen the most weakness.

The resource sector’s corporate profit performance has followed closely with commodity prices, which fell last year and remain below a post-recession peak set in early 2011.

“So far in 2013, generally higher commodity prices have helped drive encouraging growth in resource sector profits, although the sector is still in the red over the past six quarters as a whole,” Preston wrote.

Manufacturers face competitive challenges, not only from a relatively strong loonie, but also because unit labour costs have risen in Canada since the recession but remain flat in the United States, TD says.

Profits in more domestically-oriented industries have held up better, although they too have seen their pace of growth slow dramatically compared to the pre-recession period.

The study says the weakness in corporate profit can be seen in the way Canada’s equity markets have underperformed the United States since the lows seen in October 2011.

Looking ahead, however, TD expects profit performance to show modest improvement over the coming quarters, led by the export and resource-oriented sectors, as stronger economic growth in the United States next year will help lift U.S. demand.

U.S. economic growth will be weaker than anticipated in the near-term because of the recent government shutdown, but TD expects that the lost activity will be recouped next year.

The bank says commodity prices should also improve, although further gains are likely to be modest, and domestic demand growth is also likely to be slow.

“Echoing the forecast for growth in the economy as a whole, corporate Canada should see better days ahead, but not a return to the heydays seen prior to the recession,” Preston said.