Industry profitability continues to worsen as index marks largest drop since July 2010
Ottawa – The industry profitability outlook continued to worsen in April 2015 as The Conference Board of Canada’s Leading Indicator of Industry Profitability fell to 107.5, down from 107.8 a month earlier.
A drop in residential construction spending and a worsening labour market offset led the largest drop in the Index since July 2010 and the third consecutive decline. Overall, the decline mirrors the current weakness in the Canadian economy, which continues to adjust to the impact of lower oil prices.
In April, 35 of 49 industries tracked in the index saw their profitability outlook worsen. While the weakness was shared across sector groups, the manufacturing sector had the largest change in the number of industries falling into the red. Of the 17 manufacturing industries in the index, the short-term profitability outlook is now negative for 10, up from only three at the start of the year.
Contributing to this shift are weaker exports caused by the general weakness in global demand, as well as by a US economy that stalled in the first quarter of 2015. In addition, weaker domestic demand due to a colder-than-usual winter further dampened manufacturing sales.
Especially hard hit within the manufacturing sector were manufacturers of motor vehicles. This industry saw month-over-month sales drop 14.9% in February, while year-over-year sales fell 3.7%. Some of this weakness was caused by a temporary shutdown at the Fiat-Chrysler minivan plant in Windsor. But, given that more than 80% of Canada’s motor vehicle manufacturing production is exported to the United States, the industry is not fully benefiting from the recovery in US vehicle sales. Domestic vehicle sales have also been hurt by weakened consumer confidence in the oil-dependent provinces.
The retail sector indexes struggled in April, as higher unemployment and modest retail sales shook the sector’s overall profitability outlook. Although lower gas prices have left more money in consumers’ pockets, a record-cold winter in many regions dampened retail sales. With a weaker loonie translating into higher import costs, retailers’ margins will be squeezed as wholesalers pass on the higher costs of imported goods. This could continue to weigh on the sector’s profitability.
Weak commodity prices continue to burden the profitability outlook for the resource sector, with most industries there experiencing declines in their indexes. Among the industries with weakening profitability is the oil extraction industry, which experienced its ninth straight month of decline.
Oil prices saw a slight rise last month, with West Texas Intermediate (the North American Light benchmark) price rising from $48 in March to $54 in April. However, prices are still low enough to encourage companies to lay off workers and rein in costs. As well, crude inventories remain high, suggesting that any dramatic price increases in the near term are unlikely.