OTTAWA - Recent disasters — both natural and man-made — will shake the corporate profit outlook for key Canadian firms in the second half of this year, adding to an already weak economic landscape, the Conference Board of Canada predicts in a new report.
The Ottawa-based think-tank said Wednesday that its measure of business well-being declined for the third consecutive month in July, an indication that the expected surge in economic activity has yet to materialize and that company profits may be weak or even turn negative in the next six months.
"The economy in Canada and the world is struggling to find momentum and that is putting weight on Canadian exports and weighing on profits," said economist Lin Ai, who authored the paper.
The index, which is based on economic modelling and hard data, slid 0.11 points in July, following similar drops the previous two months.
The retreat was not large but of concern because of the increasing number of industries that registered declines, most in the goods-producing sector of the economy, Ai said.
The report specifically cites property and casualty insurers for heavy losses over the summer in the wake of the Alberta and Toronto floods, and the deadly train derailment and explosion at Lac-Megantic, Que.
Intact Financial (TSX:IFC), Canada's largest property and casualty insurer, is expected to be hit with a $105-million loss from the Alberta flooding, the report predicts, while TD Bank (TSX:TD) — also a major insurer — will likely take a $125-million loss from floods in both in Alberta and Toronto.
In addition, the Lac-Megantic disaster will "weigh on the industry's financial results," Ai says.
The spate of bad news did not end there. Canadian fertilizer firms are threatened with increased competition and falling prices for potash after Uralkali, the world's largest producer, announced plans to boost production.
"This news could not come at a worse time for Potash Corp. (TSX:POT) as the company is negotiating a purchase agreement for the second half of the year with China. Hefty price cuts will likely be demanded by the Chinese," the report said.
While the developments have hurt companies in the specific sectors the short term, Ai said generally weak economic conditions in Canada and abroad are primarily responsible for the gloomy profit picture.
Many manufacturers and goods producing industries are showing signs of weakness as a result of poor demand, while producers of wood products and primary and fabricated metals are being hit by low prices.
The computer and electronics products industry has also been battered by disappointing sales, mostly because the "big bang" expected from the launch of the BlackBerry 10 platform has disappointed.
On the other side of the ledger, the report noted that service oriented industries are faring better due to relatively strong consumer purchases.
While the economy is believed to have slowed in the second quarter of this year — which likely influenced the profitability outlook — economists expect gathering strength in the United States will help lift activity in Canada going forward, however.
As well, the Bank of Canada is projecting a big surge of 3.8 per cent growth in the current third quarter as the economy rebounds from the twin shocks of flooding and a construction strike in June.
Bank of Montreal chief economist Doug Porter added that news that the eurozone as a group finally emerged from a five-year recession this spring — with a 0.3 per cent quarter-over-quarter growth rate — also points to the potential for less risk in the world.
Direct trade between Canada and eurozone countries may be relatively small, Porter said, but a stronger Europe can impact Canada through other channels, particularly if it can help speed the U.S. recovery and calm financial markets.
"I think it takes two quarters to officially declare the recession over, but definitely it's good news if Europe is stabilizing," he said.
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