Growth in corporate profitability expected to slow in Q2

May 20, 2010   by PLANT staff

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.

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 US 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% between the second half of 2008 and the first half of 2009, profits had increased by 28% by the end of last year,” said Michael Burt, associate director, Industrial Economic Trends.

He said now that profitability is approaching more normal levels for many industries, the indicator suggests 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% in April, which is its first outright decline since March 2009. The Conference Board said 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, the Conference Board said improving labour markets and renewed stock market growth indicate further increases in profitability during 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 last month.

The strength of the Canadian dollar is daunting for many industries, but a boon to others. As the dollar gained more than 5% 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.

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