The pandemic economy’s big profit parade
Corporate Canada’s current outlook is far from bright. Business confidence has declined for five consecutive quarters, according to the Conference Board of Canada, but that economic pessimism does not appear to be based on results in financial statements from a wide range of business sectors. Canadian corporate profits hit a record high in 2021, jumping 62 per cent, or nearly $200 billion, to reach $514.5 billion compared with $317.6 billion in 2020, according to Statistics Canada data. The total in 2021 was 18.6 per cent higher than the previous peak of $433.9 billion in 2018.
But 2021’s earnings spike was preceded by corporate profit declines in 2020 (down 24.8 per cent) and in 2019 (down 2.8 per cent).
B.C.’s top 100 most profitable companies also generated significant earnings during 2021. Earnings jumped 67.7 per cent compared with 2020, according to data collected on Business in Vancouver’s list of the 100 most profitable companies in the province (BIV issue 1724; November 14-20).
But profits for the top 100 had dropped 40 per cent in 2019.
Nationally, resources industries have been the prime drivers of corporate profit growth.
Finance and resource companies made up half of B.C.’s most profitable companies list in 2021. Retail and tech companies were the next most represented industries on the list. The most profitable company in B.C. last year was West Fraser Timber Co. Ltd. (TSX:WFG) followed by Teck Resources Ltd. (TSX:TECK.B).
According to Canadian Centre for Policy Alternatives data, Canada’s oil and gas industry income jumped $24.2 billion in 2021 compared with the 2018-19 average.
The country’s banks generated the second-highest profit bump. Their 2021 earnings were up $16.1 billion from the 2018-19 average.
Aside from resources and finance, the retail industry recorded the largest profit growth in 2021 compared with the prepandemic two-year average. Food and beverage profit increased $3.9 billion while other retail was up by $4.5 billion. However, not all sectors in Canada have generated profit increases in the pandemic economy. Industries experiencing the largest profit declines included real estate, pharmaceutical manufacturing and professional, scientific and technical services.
Trevor Tombe, an economics professor at the University of Calgary, said that profit margins in oil and gas, petroleum products and mining have roughly doubled over the past year. Russia’s invasion of Ukraine has also driven up prices for energy and agricultural products.
However, Tombe pointed out that when resource industries are taken out of the equation, profit margins have remained stagnant and even dropped for some industries.
He said that commodity prices have increased for a number of reasons, including the strong economic recovery from the COVID-19 pandemic through 2021.
“That’s the story. The high levels of profit in those sectors are really because of global prices rises,” said Tombe. “So, naturally profits of firms that produce those items are going to increase as well.”
So where are these record pretax profits going?
In 2022’s second quarter, 49 per cent were distributed as dividends and 28.6 per cent were retained as corporate savings, while 16 per cent went to taxes, according to Statistics Canada data.
In 2019, 56.1 per cent of corporate profits were distributed as dividends; taxes took 20.9 per cent, and 8.9 per cent went to corporate savings.
Tombe said that typically, when a market is functioning well, profits encourage new companies to enter the market and established businesses to expand.
However, these are not typical times. Between the pandemic, ongoing global supply chain congestion and a looming recession, there is a lot of uncertainty.
Tombe said that uncertainty will reduce investment in sectors such as resources.
“Who knows were prices go from here,” he said. “Profits could remain elevated in these sectors if prices remain high [but] how long that lasts no one really knows.”
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