Canada / Analyst Insights
Top 10 Contributors to the Canadian Economy
by Ediz Ozelkan, Analyst
Feb 12 2019

Economic contribution can be measured in many ways. IBISWorld measures economic contribution through industry value added (IVA), which is a quantitative appraisal of what an industry returns to the economy. IVA is based on an industry’s capital expenditures via depreciation as a proxy for capital costs, wage outlays and profitability. Essentially, each of these components of an industry’s cost structure recycles value. First, value is recycled through investment in capital, which spurns value in production. Next, value comes through wage outlays, which trickle down to individual employees who then spend their money. Finally, value is achieved through profit, which is typically used to further investment in the industry for added productivity or to generate shareholder wealth, which can instigate increased investment within an industry and outside of it. Nonetheless, the top 10 contributors to the domestic economy excel in terms of revenue generation but are not always at the top of this list. Instead, the top contributors to the economy are those that create value through a combination of profitability, capital investment and wage payouts. 

 IVA totalsIva total

Commercial banking

A longstanding bastion of institutional investment, the Commercial Banking industry in Canada (IBISWorld report 52211CA) is poised to contribute the most to the domestic economy this year. With a forecast $46.5 billion circling back to the economy, this crucial driver of investment activity is expected to account for 2.2% of GDP in 2019. Rising interest rates and new mortgage regulations enacted in 2018 that reduce risk in combination with strong business formation has supported industry revenue growth in recent years. These factors have contributed to its high IVA, which returns to the economy chiefly in the form of profit, a figure that is anticipated to reach 44.7% of industry revenue.

Healthcare

Hippocratic growth prospects for the healthcare sector in aggregate is projected to facilitate a combined $70.3 billion contribution to the economy this year through the Hospitals industry in Canada (62211CA) and the Primary Care Doctors industry in Canada (62111aCA) with the second and fourth spot respectively in terms of IVA. Primary care doctors are anticipated to be one of the fastest areas of growth in 2019 and these two industries collectively are anticipated to generate 3.4% of GDP this year. Rising healthcare expenditures nationwide, an aging population and a continued uptick in government funding are expected to bolster revenue in the healthcare sector and by extension, economic contribution.

Energy

All gassed up for a recovery after years of pressured energy prices, the Oil Drilling and Gas Extraction industry in Canada (21111CA) is the third-largest contributor to the domestic economy and the fifth-largest revenue-generating industry that IBISWorld covers. With anticipated industry revenue nearing $105.0 billion in 2019, $35.7 billion is expected to be returned to the economy, chiefly through the $23.1 billion of capital and depreciation expenditures expected in 2019 after years of declining capital expenditures. A recovery in oil prices, a diminishing disparity between Western Canada Select and Western Texas Intermediate spot prices and strong demand from the United States, the industry’s primary export destination, are expected to prop up industry revenue and return value to the economy.

IT consulting

In an increasingly digital world, the IT Consulting industry in Canada (54151CA) is forecast to generate over $57.0 billion in revenue in 2019, nearly half of which is expected to reemerge in some form in the domestic economy, chiefly through the high wages that employees in this industry command. An evolving technological landscape, the increasing utility of consumer data and a continued investment in cloud-based services are all boons to industry revenue growth, facilitating value creation for the economy at large.

IVA 1

Electric power transmission

The Electric Power Transmission industry in Canada (22112CA) is the powerhouse of the national economy. Consistent revenue generation amid demographic expansion alongside sizable profit margins, stable wage outlays and continued investment in capital development are expected to lead the industry to return $23.8 billion to the economy from its projected $57.8 billion in industry revenue in 2019. Sustained demand amid demographic growth and construction activity has supported industry revenue growth, and the industry’s integral role in modern life is anticipated to continue to contribute to the economy is various ways.

Apartment rental

Armed with a new lease on life through rising asset prices, the Apartment Rental industry in Canada (53111CA) is projected to contribute $22.6 billion to the economy. While capital investments are minimal compared to real estate developers and residential construction companies, the primary facilitator of economic contribution for renters is through profitability, which remains inflated amid a supply shortage in crucial metropolitan areas such as Vancouver and Toronto. Consequently, the aforementioned mortgage restrictions have boosted demand for rental properties and a continued housing shortage is expected to bolster industry revenue growth as well as contribute to a stable return to the economy in aggregate.

Colleges and universities

Knowledge is power, and the Canadian economic engine gets a large chunk of its power from the Colleges and Universities industry in Canada (61131aCA). More people are going to school, which will bring future economic expansion through a more skilled workforce, but the immediate rewards are evident in the industry’s wage expenditures for tenured staff and administrative faculty, driving an anticipated $21.0 billion windfall to the economy in 2019.

Law firms

While representing the 39th-greatest revenue-generating industry in 2019, the Law Firms industry in Canada (54111CA) is expected to be the ninth-largest contributor to the economy with a $17.9 billion return from $26.2 billion in revenue in 2019. Collectively, profit and wages are forecast to account for more than 67.0% of industry revenue this year, translating into a return of nearly 70.0% for every dollar earned in revenue when considering capital outlays as well. A rise in business formation and the increasing complexity of intellectual property concerns are expected to spur revenue growth, driving the industry’s economic contribution for years to come despite its relative size in terms of revenue generation.

Insurance

A protector of wealth, it is no surprise that the Property, Casualty and Direct Insurance industry in Canada (52412CA) would cultivate a cycle of investment into the economy. With a forecast $17.4 billion going back into the economy in 2019, most of this return is in the form of profit and labour costs, benefiting both insurance companies and their employees and producing a twofold contribution to domestic growth. Rising asset values, a continued spike in consumer spending and overall demographic growth are forecast to catalyze revenue growth and in turn, facilitate economic expansion.

IVA 2

 

 

info graphRevenue versus value

The top revenue-generating industries do not always return value to the economy. Most top-line growth is not conducive to bottom line expansion and therefore does not contribute notably to the economy despite a promising earnings report or industry outlook. Instead, the top 10 contributors to the economy are spread among the top 40 revenue-generating industries in 2019. The top revenue-generating industries are primarily wholesale and retail operations, with Gasoline and Petroleum Bulk Stations in Canada (41211bCA), New Car Dealers in Canada (44111CA) and Gasoline and Petroleum Wholesaling in Canada (41211aCA) leading the way. Still, since operators in these industries do not produce what they sell, they can only capitalize on slim margins, typically relying on low overhead costs to stay afloat. Therefore, despite their large dollar values, they primarily shuffle existing value from industry to industry and as a result, do little to stimulate economic expansion.

 

Edited by Rebecca Simon