Corporate profitability is expected to improve over the course of 2011, The Conference Board of Canada said Wednesday.

The think tank says its monthly leading indicator of industry profitability increased by 0.6% in December, its biggest one-month gain dating back to 2001 (the earliest that data is available).

Following six months of decline, the leading indicator has risen for three consecutive months. Still, the overall index has some catching up to do. Between March and September, it declined by 2.4% and it finished 2010 about 1%lower than in December 2009. 

“The recent improvement of the index is thanks to stronger non-residential investment, a rising stock market and increasing raw material prices,” says Maxim Armstrong, a Conference Board economist.

“Thirty-eight of the 49 industries covered by this indicator recorded increases in December, which is the most since July 2010. Having positive profit indicators in four out of every five industries is another welcome sign, as it corresponds with periods of strong economic growth.”

Firms in the primary sector are poised for a profitable year, the Conference Board predicts. Demand for several raw materials has boosted both sales and prices. The agriculture and forestry industry and the mining industry posted the biggest increases of their index in December compared to a year earlier― 12.3 and 10.6%, respectively.

The real estate industry had a tough summer, but there is cause for optimism in this area. Since September 2010, both prices and sales of existing houses have begun to improve. As a result, the leading indicator for the real estate industry has increased in each of the last three months.

The think tank cautions that the strong Canadian dollar has a significant effect on profitability in most of the industries covered by the leading indicator. The impact is positive for some industries and negative for others.

It notes that the exchange rate was much less volatile in 2010 than in previous years, but the Canadian dollar remained very high by historical standards and is expected to remain at or near parity with the U.S. dollar this year.

IE