- Florence Jean-Jacobs
Principal Economist
Economic News
Business Investment and Profits Appear to Have Turned a Corner in Q2
August 30, 2024
Highlights
- Profits of Canadian non-financial corporations registered positive quarterly growth of 12.9% (q/q annualized) in Q2 2024, after declining in all but one of the preceding seven quarters. Profits are now 1.1% above their level one year ago, yet they remain well below their Q2 2022 peak (graph 1).
- Gains were broad based, with net income before tax (NIBT) rising in 32 of 39 non-financial industries in the second quarter. Higher energy prices helped support profits in the oil and gas extraction and support services as well as in petroleum and coal product manufacturing, partially reversing Q1’s price-driven decline. Net income declined q/q in agriculture and forestry and building material wholesaling as well as motor vehicle manufacturing, but all remained nonetheless in positive territory.
- Meanwhile, non-residential business investment grew at a solid pace in Q2, with real investments rising by 11.1 % on a quarterly annualized basis (table 1). This follows declining real business investments in the second half of 2023, and modest growth of 2.4% in Q1 2024 (which was revised downward).
- Spending on aircraft and other transportation equipment increased sharply in Q2, but this category is subject to large swings. Investment in engineering structures also advanced, driven largely by firms in the oil and gas sector, as was the case in Q1.
Implications
While the outlook is gradually improving, the economic environment still poses challenges for Canadian businesses. Headwinds include cost-related obstacles External link., subdued demand (such as relatively slow household spending), and high interest rates, although the prospect of further rate cuts should boost already-improving business confidence External link..
Smaller businesses are likely those facing the greatest hurdles: a larger proportion expect declines in demand and profitability External link. in the next three months compared to businesses with 100 employees or more. Industry-wise, the agricultural and forestry sectors are also facing tough conditions, as evidenced by declining profitability in Q2. Low selling prices, and higher duties imposed by the US in the case of lumber, could well prolong these challenges.
On the bright side, the pickup in real business investment, notably in machinery and equipment, has led to a per capita increase in Q2 2024, a first since the first quarter of last year (graph 2). There is still a long way to go to return to pre-pandemic levels and to address Canada’s underperforming productivity External link.. While the first two quarters of 2024 appear to be pointing in the right direction, more broad-based strength will be needed for the trend to be sustained. In the near term, uncertainty around the US election and its fallout, geopolitics, and the health of the consumer are likely to represent headwinds for many businesses.
