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Canadian profitability outlook down amid deteriorating global economy: CBOC

Report suggests profitability indicators lowest in May since Sept. 2011.


June 12, 2012
by PLANT STAFF

OTTAWA: The deterioration of the global economy in recent weeks has had an impact on the profitability outlook of Canadian companies, according to a new report by the Conference Board of Canada (CBOC).

In May, the Leading Indicator of Industry Profitability posted its biggest decline since September 2011. Of the 49 industries covered, 13 reported a decline. Several industries that had been posting robust increases since the beginning of the year—such as mining, gas stations, and banking—saw their indexes grow at a much slower pace in May.

The report suggests weaker profitability outlook is linked to the ongoing European debt crisis. Following Greece’s failure to form a government last month, the possibility it will leave or be forced out of the Eurozone reached a new high, triggering another round of uncertainty in global stock and commodity markets.

A Greek exit would put the survival of the currency union at risk due to the likely contagion effects for other deficit-ridden European countries, such as Spain, Portugal, and Italy.

The woes affecting the European economy are having an impact on economic growth in all regions of the world, including in the BRIC (Brazil, Russia, India, and China) countries. The Chinese economy has shown numerous signs of weakness recently. The official Chinese purchasing managers’ index for manufacturing was down significantly in May, falling from 53.3 in April to 50.4—its lowest level in five months.

Energy consumption growth has also been slowing in China. The country’s National Energy Administration reports that electricity consumption was up only 3.7% on a year-over-year basis in April, compared with 7% the previous month. India’s economy is turning out to be weaker than expected, with annualized GDP growth in the first quarter of only 5.3%—its smallest increase since 2003.

Brazil recorded an even worse performance. Output there grew at an annual pace of less than 1% in the first quarter.

In the manufacturing sector, the index for the computer and electronic products industry posted its worst decline of the year so far, falling to its lowest level in more than two years. A large part of this decline was due to the ongoing difficulties at Research In Motion (RIM). RIM stock fell more than 20% in May, and the company is expected to post an operating loss for the first quarter of the year. RIM’s share of the smartphone market has been falling rapidly in recent months due to fierce competition from other manufacturers, such as Apple and Samsung.

Despite ongoing uncertainty surrounding the global economy, the profitability outlook for autos and auto parts manufacturers continued to improve in May. The latest indicators for the US economy, however, do not paint a particularly bright picture. Consumer confidence fell for a third consecutive month in May and posted its steepest drop since October 2011. Job creation stalled in each of the past two months, with only 69,000 jobs created in May and 77,000 in April. Still, automakers have reported strong growth in sales in the US since the beginning of the year, with double-digit growth in May against those for the same period in 2011.