Canada’s private-sector firms see quarterly turnaround

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Canada's private-sector businesses turned in their first quarter-to-quarter profit growth in more than a year in the third quarter, despite continued deep losses in the beleaguered oil and gas sector, as manufacturing and financial-sector profits rebounded smartly following the Canadian economy's second-quarter slump.

Statistics Canada reported Thursday that corporate operating profits totalled $80.7-billion in the quarter, up 14 per cent from the second quarter. It marked the highest profit total since the third quarter of last year, and the first time since the 2015 second quarter that quarter-to-quarter profits had increased. It was also the biggest percentage gain since the second quarter of last year.

Despite the quarterly turnaround, however, profits were still down 1.1 per cent year over year.

The upswing came as Canada's economy bounced back from a second-quarter contraction, brought on by the impact of the Alberta wildfires and surprisingly weak export demand. Economists estimate that the country's gross domestic product grew at an annualized pace of between 3 and 3.5 per cent in the third quarter ended Sept. 30, after declining an annualized 1.6 per cent in the second quarter. (Statscan will release third-quarter GDP figures next Wednesday.)

That sharp turnaround was evident in the corporate earnings, led by a 33-per-cent surge in financial sector profits over second-quarter levels. The gain was fuelled in part by a drop in expenses for insurance companies, as they put the immediate spike in costs from the Alberta wildfires behind them.

Profits among non-financial companies were up a combined 6.6 per cent quarter to quarter, including a 27-per-cent jump in manufacturers' operating earnings.

The oil and gas extraction and support industry posted its seventh consecutive quarter in the red, with operating losses of $3.8-billion, as the sector continues to suffer the fallout from the late-2014 collapse of global oil prices. But that was the smallest loss in three quarters, and the second consecutive quarter-to-quarter improvement – adding to the evidence that the deep downturn in the sector is approaching its bottom. Oil and gas extraction profits were down 22 per cent year over year, but that's their smallest decline since the end of 2014.

"Profits should continue to grow over the remainder of the year, as a healthy U.S. economy and weak Canadian dollar help to lift exports. Generally higher commodity prices during the fourth quarter should also give revenues a boost," said Toronto-Dominion Bank economist Dina Ignjatovic in a research note.

But she said the profit outlook further out has been "clouded" by the outcome of the U.S. presidential election, won by Donald Trump, who advocated government stimulus spending and a protectionist trade agenda during the campaign.

"Pro-growth policies could sustain Canadian demand and profits, but increased protectionism in the U.S. could have the opposite impact," Ms. Ignjatovic said.