Canada's latest corporate profits data may be revealing a very familiar route out of the country's economic wilderness: through the energy sector.
Statistics Canada's quarterly financial statistics for enterprises, released Tuesday, showed operating profits for Canadian corporations surged 7.4 per cent in the first quarter from the fourth quarter of 2013 – the biggest percentage gain in three years – to a record $88.6-billion. Compared with a year earlier, profits were up a solid 12.3 per cent.
Lest you think these numbers have been juiced by the financial sector (an understandable assumption, given that three of the country's biggest banks reported a combined $6.1-billion in quarterly profits in the past week), Statscan noted that the operating profits of financials were up a modest 2.5 per cent in the first quarter from the previous quarter. Non-financials were the big drivers of the profit growth, up 9.3 per cent.
But the gains were far from broad-based. Only 13 of 22 sectors posted quarter-to-quarter growth. Thanks to the strongest energy commodity prices in five years, the sector – a combination of oil and gas extraction and energy-related manufacturing (petroleum and coal processing) – saw operating profits surge an astounding 47 per cent, accounting for more than half the total profit growth. (Another big chunk of the profit improvement stemmed, essentially, from a staunching of the bleeding at BlackBerry Ltd.)
It smacks of the continuation, perhaps even a new escalation, of the two-tiered nature of Canada's economic recovery – which raises some legitimate questions about just how healthy, let alone sustainable, the corporate profit resurgence really is. Still, if one sector is going to carry Canada on its back in the next stage of the recovery, energy's not a bad choice.
While some have blamed the energy sector's race ahead of the rest of the economy for a sharp divide in the country's well-being along geographical (or perhaps, more accurately, geological) lines, the fact is that energy wealth helped Canada dodge the worst of the Great Recession and emerge as an early leader in the global recovery. The sector's recent return to strength has been a key catalyst in Canada's export recovery – considered a vital component in the economy's next stage of growth. Over the past 12 months, as Canadian exports have rebounded to their highest levels since the recession, energy products have accounted for fully two-thirds of the gains.
The energy sector's resurgence could also throw much-needed fuel on domestic business investment. The oil and gas extraction business is a particularly capital-spending-intensive segment of the economy, and the Statscan quarterly enterprise data show that even as profits have surged, oil and gas extractors have been spending more cash than they have been bringing in – to the tune of nearly $10-billion in net cash outlays over the past six quarters.
The higher commodity prices are spurring oil and gas producers to ramp up exploration and development, and that's putting cash to work, and making a dent in Canada's pile of corporate "dead money," as former Bank of Canada Governor Mark Carney famously called it. (According to the Statscan report, corporate Canada's cash position at the end of the first quarter was $464-billion, down more than $30-billion from its mid-2012 peak.)
The one sticky point on an oil-slicked recovery, though, is the impact on the Canadian dollar, which is still perceived in global foreign-exchange circles as a petroleum-driven currency. The loonie has recovered 3 cents against the U.S. dollar since mid-March, rising along with crude oil and natural gas prices. This has eroded some of the benefits that non-energy exporters had been expected to enjoy from last year's declines in the currency. It appears the two-speed recovery will remain a problem, but it's better than a no-speed recovery, isn't it?
David Parkinson