March 18, 2010
Economic Snapshot
Stronger profits, balance sheets signal increased investment ahead
JOHN CLINKARD
consulting economist, CanaData
The operating rate of Canadian industries in the final quarter of 2009 increased by a record 2.2 percentage points, from 68.7% to 70.9%.
This was consistent with a sharp rise in overall economic output.
Despite this sharp increase, however, the economy is still operating well below the most recent peak, 85.1%, which it reached in the third quarter of 2004.
In the fourth quarter of 2009, all non-manufacturing industries posted significant gains in capacity use, led by the forestry industry, where the effect of strong growth of residential construction caused the output of the industry to increase by 13.3%.
This strength in residential construction, which more than offset the effects of a dramatic drop in non-residential building in Q4, also caused the utilization rate in the construction sector to increase to 70.2% from 69.1%.
In oil and gas extraction, the impact of increased crude petroleum production more than offset a decline in natural gas production, thereby causing the operating rate in the industry to increase to 78.0% from 76.2%, its highest rate since the first quarter of 2009.
In mining, the operating rate also increased sharply to 57.6% from 50.7%, largely on account of stronger output of support activities.
Within the manufacturing sector, the overall operating rate increased to 69.7% from 67.0% due to increases in 13 of the 21 major manufacturing industries.
While there is still plenty of excess production capacity in the overall economy, this sharp gain in capacity use in the fourth quarter — together with back-to-back increases in operating profits in non-financial corporations in the second half of 2009 — points to stronger business non-residential investment later in 2010 or early in 2011.
This outlook is reinforced by the fact that corporate balance sheets are in excellent health, with near record low debt-to-equity ratios and high ratios of cash-to-total assets.
John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
and business non-residential investment
Data source: Statistics Canada. Chart: Reed Construction Data – CanaData.
