Canadian corporate profits are set to decline to 2003 levels this year before rebounding in 2010, according to TD Bank economists.

In a new report, TD Economics says, “Canadians are just beginning to feel the effects of weakened profits after a near-seven year boom that began in 2002. By the time 2009 is tallied, we believe before-tax profits will have retreated by roughly 30%, marking the largest pullback in a single year since the data commenced in 1961.”

“Although corporate profits are expected to be on the mend at the tail-end of this year, as the domestic and global economies stabilize, the recovery isn’t likely to be vigorous and by the end of 2010, the level of Canadian profits are expected to have returned to only 2005 levels,” it adds.

The report says that the year ahead will be filled with challenges for Canadian corporations “as a mix of faltering demand, plummeting commodity prices, and a difficult lending environment set the stage for the worst profit performance since the 1990’s recession.”

Its model predicts a profit decline of 29% in the year, but it allows given the prevailing uncertainty a range of 23% to 35% is more realistic, which would represent a reversal of most of the gains accrued over the last five years. “Poor profit performance will encourage corporations to cut costs through employment and reduce excess capacity. Therefore, once foreign and domestic demand begins to recover in the second half of 2009, and commodity prices rebound by 24% in 2010, Canadian firms will be in a position where revenue growth will outstrip expense growth, allowing profits to bounce back by 6-12% in that year (about 20% on a fourth-over-fourth basis),” it predicts.

IE