February 26, 2010

Economic update

Financial services sector leads corporate profit recovery

ALEX CARRICK

Chief Economist, CanaData

Canadian corporations experienced an increase in operating profits of 7.9% in fourth-quarter 2009 versus third-quarter 2009, Statistics Canada says in a report released this week.

This was the second quarter of growth since profits hit bottom in the second quarter of last year, at $50.2 billion.

At a current level of $60.1 billion, however, they are still well below the $77.3 billion mark they reached before the recession.

Profits in non-financial industries rose 4.4% in the fourth quarter, while profits in financial industries rose 19.7%. Out of 22 industrial sub-sectors, 15 reported higher profits in Q4/09.

Statistics Canada reports that most of the gain in profits for financial industries came in banks and insurance companies. They credit this mainly to a decline in expenses.

Manufacturers reported a 4.4% quarter-to-quarter profit gain.

Top sub-sector contributors were chemicals, plastics and rubber, wood and paper, and primary metal producers. Several of these tie in to the pick-up in automotive sales.

Profits in the oil and gas sector and the petroleum and coal sector were +8.6% quarter to quarter. This resulted from both higher prices and greater sales volumes.

Higher corporate profits are positive for the economy on several counts.

They help to fund the machinery and equipment purchases that will lead to necessary productivity improvements for Canada to remain competitive in global markets.

They are a justification for the improvement in stock market indices — and consequently, consumer confidence, that has been occurring over the past several quarters.

Finally, they will eventually provide some of the financial means to expand capacity when warranted, thereby helping to resuscitate privately-financed construction activity.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com

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