Group CUO on what makes the specialist insurance sector so unique
CIBC Capital Markets has released its latest report on the investment bank’s insights on the economy.
The report found that higher interest rates, a slowing economy, and diminishing corporate pricing power have begun to take its toll on Canadian corporations, further noting that the era of easy profit was over.
The annual GDP Growth in the country has averaged over 4.5% in nominal terms over the past two decades. Real net profit growth in the non-financial sector has averaged over 11% while corporate profit margins were currently above their long-term average.
The report also found that the aggregate profit margin of non-financial corporations in Canada hovered at almost 9% in 2022 while earnings margins in the TSX was at 12% on average since the pandemic.
“Since we live in Canada, its aways worth checking whether that observation is valid when we exclude the energy sector and adjust for inflation,” said CIBC Economists Benjamin Tal and Ali Jaffery in the report.
“Real profits excluding the energy sector have shown less of a pronounced post-pandemic, but continue to maintain a very high level,” they said further.
The report further found that the profit as a share of GDP rose from 5% in the 1990s to the 15% seen currently as cyclically adjusted margins were showing the same trajectory.
“Another possible factor here is a structural change in the composition of corporate Canada with high margin sectors seeing their share in the economy rising,” said the economists, further noting that many service sectors saw an increase in their aggregate profit margins with the share of the economy of higher-margin industries rising over the past two decades.
“However, we estimate that the shift in composition explains less than 20% of the bump in margins during that period,” noted the economists.
The profit surge that came after the post-COVID era was also seen to be fading. While the margins widened at the peak of the pandemic shock, the economists noted that it was temporary. As disruptions in the supply chain were no longer an issue, margins have notably decline.
“That trend will continue in the coming quarters as businesses face a margin squeeze under the weight of high interest rates and a weakening economy,” said the economists.
They further stated that the current squeeze on margins brought by interest rates and slowing demand will not end even as cyclical conditions ease up. Canadian firms may be left with no choice but to make drastic changes to minimize the damage as there is the need to renew and deploy capital in ways that will complement labour. The means to do so comes with the non-financial profit margins being accompanied by the accumulation of profits worth almost 8% of their assets.
While capital spending growth has been seeing a decline over the years, the end of the easy profit era may urge a growing number of firms to look to capital spending as a necessity.
