Corporate profit margins at 27-year high and likely to stay there

Canadian corporate profit margins were at a 27-year high in the fourth quarter of 2014, helped by a falling loonie and lower labour costs, according to a study by CIBC Economics.

Those margins are equivalent to more 8.2 per cent of sales for non-financial corporations, according to a study from CIBC. While corporate profit margins fluctuate with the economy, historically they have tended to average less than five per cent.

CIBC deputy chief economist Benjamin Tal argues there has been a structural shift in the economy over the past two decades that means higher profit margins are here to stay.

"By all measures, higher corporate profit margins are here to stay," he said. "Some of the structural forces that helped to elevate the trajectory of corporate profitability might start to fade in the coming years, but for the here and now, profit margins are fully supported by the fundamentals."

Globalization, innovation and the low cost of capital have helped corporations earn more and the 20 per cent drop in the value of the dollar in the past year has helped exporting sectors, especially agriculture and manufacturing.

Labour costs soften

At the same time, labour costs are softening. In 2012, Canadian labour costs rose by 3.5 per cent, but in the past year, the average increase is one per cent.

"No less than one-third of Canadian GDP last year was produced by sectors with falling labour unit costs," said Tal.

So even when the economy takes a downturn, as it did in the first quarter of 2015, profit margins for most Canadian corporations are expected to remain high, Tal said.

Companies are cash-rich, but that hasn't translated into investment or expansion, Tal said.

"Over the past five years, we are waiting and waiting and nothing is happening. Their cash position is record-high, profit, record-high. Companies are more stable, but not willing to start investing, they are waiting for something that is not here, not yet."

Oil left behind

CIBC says the gap between non-energy profit margins and real GDP growth is about as large as in any non-recessionary period in the past 25 years.

Profit margins vary by industry. The rail and truck transportation sectors have seen a big rise in their margins, as have makers of pulp and paper, motor vehicles, electrical equipment, clothing, textile and basic chemicals. Construction and retail, by contrast, are seeing margins shrink.

But one major exception is the oil industry, where margins started to fall even before the drop in oil prices last year. The oil and gas sector is "dancing to a totally different tune," CIBC said in its report.