OTTAWA — Don’t look now, but recent signs of a tentative economic recovery may be masking another, possibly deeper, problem: a “profit recession.”
Pullbacks in production by two of Canada’s biggest sectors — energy and manufacturing — have hit overall business profits hard in recent months: In the first quarter of 2016, corporate earnings fell by the most in more than five years, Statistics Canada reported Thursday.
The oil and gas sector, alone, has seen earnings drop in each of the last five quarters.
“It’s a profit recession, but for equity markets, this is old news,” said Avery Shenfeld, chief economist at CIBC World Markets.
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“Where the economy is feeling it (the fall in profits) is in capital spending, which is dropping this year in both resources and manufacturing,” he said. “Profits, or at least profit expectations, are one key to capital spending plans. When profits are down, you’re not in the mood to expand.”
Earnings across corporate Canada were off 4.6 per cent to $73.1 billion between January and March — the third consecutive quarter to post declines, according to Statistics Canada.
First-quarter earnings were the worse since the fourth quarter of 2010, when profits fell to $68 billion.
“While real GDP growth is expected to have bounced back to over 2.5 per cent in the first quarter of the year from a very weak fourth quarter (in 2015), the low oil price environment was still likely to weigh on overall income growth,” said TD economist Diana Petramala in a note to investors.
“Since peaking in the third quarter of 2014, Canadian corporate profits have fallen by $18 billion.”
Losses in the oil and gas sector totalled $4.8 billion in the first quarter, the fifth consecutive drop in profits and also the worst performance since 1988, when records began.
The Alberta wildfires “will weigh heavily on the profit environment in Q2, particularly for the oil and gas, as well as finance and insurance sectors,” Petramala said.
Financial sector earnings overall were down 7.1 per cent to $22.4 billion between January and March.
“Weak operating profits in the manufacturing, construction and mining sectors more than offset improving profitability in the retail, transport and warehousing, real estate and leasing and professional, scientific and technical services,” Petramala added.
The other the major sector taking a beating in profits has been manufacturing — a diverse profit and regional industry that has also been affected by cutbacks following the collapse of global oil prices began impacting energy sectors in Alberta and Newfoundland and Labrador, particularly, in the last half of 2014.
In the first quarter of this year, Statistics Canada said profits for manufacturing companies fell by 7.8 per cent to $10.2 billion.
The new data comes at a time of renewed optimism that the worst may be behind for the economy.
The Bank of Canada on Wednesday left its key lending rate at 0.5 per cent — certainly a more optimistic sign than a decision to cut borrowing costs to help support weakened output.
Instead, governor Stephen Poloz anticipates much stronger economic growth in the third quarter of this year, after an expected second-quarter decline due to the combination of weaker oil prices and wildfires in Alberta.
“There’s no doubt that the profits are disappointing (but) it was not unexpected,” said Matthew Stewart, associate director for national forecasts at the Conference Board of Canada.
“And a lot of that was the drop in oil prices in the first quarter. You can see that when you look at the numbers. Most of the drop in profits was in the energy sector,” he said.
There is also “this continuing slide in profits in manufacturing, and you wonder if they’re going to boost investment. And without a boost in investment, we’re going to have a hard time seeing a pickup in growth next year.”
“When you see the manufacturing profits continue to slide it does increase that cause for concern,” Stewart said.