Canada’s corporate profits fall sequentially in Q1, likely to grow at modest pace in long term

Canada’s operating profits dropped in the first quarter of this year, as compared with the fourth quarter of last year, falling 7.4 percent sequentially. However, on a year-on-year basis, profits rose soundly by 19.1 percent, reflecting last year’s more challenging operating environment, noted TD Economics. Out of 17 major non-financial industries, 10 saw rise in their profits, but despite that the overall profits were slightly down, falling 0.4 percent.

The headline figure was driven by drops in manufacturing and wholesale trade and utilities. Profits rose modestly in the oil and gas extraction industry, marking the fourth consecutive quarterly gain. Canada’s financial industries also recorded profits drop as a whole, falling 18.4 percent on a quarter-on-quarter basis. This was mainly because of the life insurance industry, where an adjustment to actuarial liabilities led to declines. Stripping life insurance, financial industries would have seen a fourth straight rise in operating profits.

Lending moderated slightly in the first quarter. Residential mortgage loans were up 0.7 percent in the March quarter, while consumer lending was flat at 0.3 percent. Lending to businesses were up for the third consecutive quarter. Meanwhile, leverage within the financial industries carried on declining. Furthermore, leverage amongst non-financial corporations also dropped a bit in the March quarter as equity rose faster than debt.

Looking into the data, it is evident that one-off shocks are distorting the picture. Stripping insurance carriers and related industries, operating profits were slightly up in the March quarter.

The first quarter might not have seen a great performance; however, current indications imply that the economic backdrop should continue to be supportive of corporate profitability, noted TD Economics. Current weakness in inflation does imply that slack remains in Canadian economy, leaving space for above-trend growth. Therefore, the growth outlook for the quarters ahead should be widely supportive of Canada’s corporate profits.

“Taking a longer-term view, the expected 'normalization' of economic activity – both in terms of the pace and sources of growth – is likely to weigh on profit growth”, added TD Economics.

Rising long-term rates are expected to be widely supportive of the financial sector, although a normalization of housing activity is expected to act as a headwind to this and number of other sectors. High household indebtedness is expected to be a drag on consumer spending and therefore the outlook for the retail sector. While corporate profit growth is expected to be positive in the longer-term, a modest pace of growth is likely to prevail, stated TD Economics.