- Florence Jean-Jacobs
Principal Economist
Businesses Are Feeling the Economic Headwinds: Business Investment and Profits Drop in Q3
Highlights
- Profits of Canadian non-financial corporations dropped sharply in Q3 (-38.5% q/q annualized), after more modest declines in previous quarters (Q2 was revised down to a 5.4% q/q decline). This brings profits to their lowest levels since the pandemic (graph 1).
- Profits declined for nearly half of non-financial industries, with the largest drops observed in telecommunications and mining and quarrying (except oil and gas), both of which experienced higher expenses amidst challenging market conditions. Net income also declined for motor vehicle manufacturers in a quarter marked by retooling at assembly plants. Higher earnings in the oil and gas and refined petroleum sectors partly offset the decline.
- Non-residential business investment also disappointed in Q3, with real investments down 11.3% q/q annualized, erasing most of the gains from the previous quarter (+14.1% q/q annualized in Q2).
- The drop in real investment in machinery and equipment entirely erased the prior quarter’s growth in that category. Reduced spending in aerospace and parts drove most of the decline (see table 1 for details). On the bright side, spending on intellectual property increased for a third consecutive quarter.
Implications
Corporate results in Q3 confirmed that the market environment remains challenging and uncertain for many businesses. While interest rates and cost-related obstacles are easing, Canadian companies are not quite ready to press on the investment accelerator. Higher expenses (e.g., inputs, wages, debt External link.), still-subdued demand External link. and an uncertain trade environment appear to be constraining capital spending and expansion plans.
In a survey External link. conducted from October to early November, Statistics Canada found that nearly three-quarters of businesses were very or somewhat optimistic about their outlook over the next 12 months. But with President-elect Trump’s tariff threat, the outlook could worsen, especially for businesses that depend on exports to the US.
But now is not the time for businesses to play wait and see. With an aging workforce, planned reduction in population growth that could temper Canada’s labour supply, and a tough competitive environment, Canadian firms need to accelerate their digital transformation and invest in productivity-enhancing processes and equipment. This will allow them to distinguish themselves on value-added features and innovation. Our US counterparts are certainly doing so (graph 2).