Canada's non-resource manufacturers were already looking less competitive than other nations' before the resource boom, but a cheap dollar helped mask their problems. With soaring commodities and a strong currency, their plight has worsened. For now, the operators in the winning sectors are too busy raking in the bucks to pay much heed to such a gloomy assessment of the future. Just about every key resource Canada produces-with the notable exception of natural gas-has reaped the enormous benefits of surging global demand and skyrocketing prices. The smarter, more agile manufacturers and service providers are tying their futures to the same track. Everything related to the complex business of extracting and shipping resources, from fabricated metals, equipment and technology to transportation and finance, is cleaning up.
Colmar sees more of this in his crystal ball, citing a global economy that is even stronger than it was last year, and monetary policies that remain loose enough to encourage further expansion. Sure, the Americans are ending their experiments with quantitative easing; the Chinese will impose further restrictions on bank lending to ease inflationary pressures; and central banks everywhere will slowly raise interest rates. But as Colmar observes, "nobody is looking to really slam on the liquidity brakes here and cause the recovery to derail. Right now, we don't see any red flags on the horizon."
But all bets are off if the Chinese cool their commodity spending binge while turning their attention to worrisome domestic price inflation and the threat of bubbles in real estate and other assets. And it's anyone's guess what a planned shift in focus to increased domestic consumption and development of the nascent service economy will do to Chinese demand for raw materials.
"We're expecting everything to sort of pull back in the next couple of years," says Francis Fong, an economist with TD Bank. Still, growing demand for Canada's resources will remain a bulwark for the economy, helping to cushion it from the dangers posed by further trouble in the still-critical U.S. market or falling consumption at home, as Canadians stop spending like shopaholics, in the face of higher fuel and food prices and rising interest costs on their growing piles of debt. "Fundamental demand for commodities will still benefit Canada in future," Fong says. "But probably not to the same degree that they have been over the past nine months."
TD predicts profit growth will moderate, in line with a slowing economy, to about an average of 2%, quarter over quarter, between now and the end of next year. This points to a corporate take of about 13% for this year, dipping to 8% in 2012. That would still place Canada comfortably ahead of its larger industrial competitors on the profitability scale. British firm Consensus Economics puts U.S. earnings growth this year at 6.1%, and Germany's at only 5.3%, year over year.
But quite apart from what happens to China's celebrated growth story, other potential storm clouds are gathering that could rain all over Corporate Canada's profit parade. "It's going to become more of a challenge for the North American economy to grind out growth," says Doug Porter, deputy chief economist at BMO Capital Markets. "The [Canadian]economy faces all kinds of challenges at this point. There's very little pent-up demand on the consumer side. If anything, we've got almost the reverse. So we're going to be relying on a stronger global economy over the next year, which is still a reasonable assumption. But it's not a foregone conclusion."
If China and the other high-growth parts of the emerging world let us down, if the two-trick act folds its tent and Canadian consumers tighten their belts, those sighs of relief in corporate boardrooms across the land could once again be replaced by heart-wrenching cries of despair.