For all the talk of corporate “greedflation,” profit margins for non-financial companies are offering yet another sign high inflation and rising interest rates are hammering the Canadian economy.
New figures released by Statistics Canada this week show corporate profits in the third quarter fell for the first time on a seasonally-adjusted basis since the start of 2020, when Statscan began reporting corporate financial performance in that way. Net income before taxes declined 8.1 per cent to $137-billion compared with the previous quarter.
The earnings drop is putting a crunch on corporate profit margins, which had remained largely in line with prepandemic levels, despite companies in many sectors reporting record profits on surging revenues over the past two years.
Though analysts have been warnings for months about a slowdown in corporate profits, now that margins are being squeezed it could have a nasty knock-on effect for the rest of the economy and will likely heighten recession fears.
To preserve their bottom lines, companies will face pressure to cut costs – in other words, job cuts – while looking for opportunities to pass on even more of their rising costs to consumers. Shrinking margins could also create additional headwinds for markets as investors downgrade their expectations for profits in 2023.
Decoder is a weekly feature that unpacks an important economic chart.