Canadian corporate profits bounce back in Q2

Corporate profits unexpectedly rebounded in Q2, rising 12.9% (q/q) after a decline of 10.6% in Q1. However, after falling in the prior two quarters, profits are still 3.8% lower than they were a year ago. Nonetheless, profit growth was not widespread.

Operating profits only increased in 11 of 22 industries. Growth was primarily due to a turnaround in financial sector profits (always a volatile component), which rebounded 49% (q/q) after two quarters of very big declines.

Operating profits in the non-financial sector rose a more modest 1.5%(q/q) in Q2, and profits remain 13% below year ago levels. Oil and gas extraction posted a second quarter of outright losses in Q2, although the losses were slightly smaller than Q1. Weakness was also seen in transportation and warehousing (-13%), wholesale trade (-0.3%), mining (-4.5%), and information and cultural industries (-6.7%)There were a few bright spots, however, as manufacturing sector profits rose 6.5%(q/q) on broad-based gains across sub-sectors. Retail sector profits also improved (+3.7%).

Better news on corporate profits is welcome. However, this was not an overwhelmingly positive report. Profit growth outside of the financial sector was very modest and profits remain below year-ago levels. Moreover, renewed weakness in commodity prices in Q3 casts a pall on prospects for resource producers.

"We expect the Canadian economy to return to growth in Q3, and weakness in corporate profits should abate alongside improvement in the broader economy. A lacklustre profit backdrop has held back business investment so far in 2015, and further weakness in capital spending is expected to be a key feature of the Q2 GDP report when it is released next Tuesday'',says TD Economics.