There's a song dating from the early-1980s recession that goes:
It takes money, to make money It takes money, to make money Go down to the bank, get on your knees, Excuse me banker, I'm beggin' you please…
It's a refrain that rings true for dozens of cash-thin Canadian companies that found themselves on their knees in the wake of the Great Global Credit Freeze. As Corporate Canada began clearing away the debris from the worst economic storms since the 1930s, refinancing became an albatross for many companies. Access to low-cost capital in the credit markets dried up; lenders imposed tougher conditions; and ambitious resource projects ended up on the shelf.
Those carrying little or no debt on their books weathered the rough seas remarkably well. For some-the big banks and insurers, Research In Motion, major telecom providers and a smattering of energy, industrial and retail companies-it was a case of: "Recession? What recession?"
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Others, however, suffered mightily from their lack of financial depth. Especially hard-hit were the many junior resource companies that plunged to the lower rungs in our latest ranking of Canada's 1,000 largest publicly traded companies.
The 1,000 managed to rack up only $55.7 billion in combined total earnings in 2009, a decline of 28.8% from the previous year, which itself was one of tough sledding as asset bubbles collapsed around the world. A closer look at sectors reveals that when it comes to the publicly listed component of Corporate Canada, the trend toward a narrowing, two-sector economy-financial services and resources-continues unabated. Banks accounted for 27% of total profit, and insurers another 12%. Oil and gas chipped in nearly 13%-a dramatic decline from 2008, when energy prices reached stratospheric levels (at least in the first half of the year) and these energy producers' share of the profit pie totalled just under 36%.
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The aggregate profit figures can be misleading, mind you. "There's a lot of cyclical rebound in particular industries that are not necessarily reflective of the underlying profitability of the corporate sector [as a whole]" says Montreal investment author Tony Boeckh, a 40-year market veteran.
And things could get worse in a hurry. Canada is bound to feel the pinch as the world wrestles with the latest fallout from Europe, where fiscal woes and soaring debts are prompting aggressive belt-tightening in the United Kingdom and across a large swath of the 16-country Euro zone. Then there is the growing inevitability that U.S. policy makers will soon be embracing austerity themselves, shutting off the spending taps. But worst of all from a Canadian perspective, a slowdown looms in China, where officials are fretting aloud about new asset bubbles and dangerous domestic price inflation. Any government-orchestrated downward shift would play havoc with Canadian earnings, because rapid Chinese expansion has played a crucial role in driving up demand-and prices-of energy, metals and most other resources. If China retrenches and the U.S. recovery sputters, Canadian profits are likely to prove weaker than most analysts estimate all the way through 2011.
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"Unfortunately, what had been a huge tailwind-a major bounce in commodity prices from their extreme lows last year-has suddenly pulled a U-turn because of concerns over the European outlook; but also because of a very different environment in China, where officials have gone from pushing the accelerator to the floor to now reaching for the brakes," says Doug Porter, deputy chief economist at BMO Capital Markets. "The [profit]outlook has been muddied, to say the least."
Yet until about mid-April, Canada's recovery appeared sturdier than even the most bullish of optimists had dared hope. "It's almost like the recession never happened for the housing sector and consumer spending. Both are effectively back to pre-recession levels," Porter says.
But then a little sovereign debt problem in Greece, some hand-wringing in China and a bout of sabre-rattling from a truculent North Korean government reminded the markets just how fragile the global rebound could turn out to be-and what impact a flatlining world economy might have on a country that depends increasingly on resource exports to replace a dwindling manufacturing base.