The Canadian economy may be underperforming, but the same can’t be said of the country’s corporations.

According to a study conducted by economists with CIBC World Markets, the average profit margin of Canadian non-financial corporations hit a record high of 8% during the fourth quarter.

And Statistics Canada reported that while fourth-quarter operating profits across all industries declined by 2.8% quarter over quarter, net profits rose by 2.2% over that same period.

On a year-over-year basis, net profits climbed 12.3%, while net profits for non-financials were up by 14.6%.  

Meanwhile, Canada’s economy grew by 2.4% annualized during the fourth quarter and 2.5% for full-year 2014.

Bank of Canada Governor Stephen Poloz previously identified gross domestic product (GDP) growth of 2.5% as the minimum growth threshold necessary to remove slack from the economy.

Although Canada managed to hit that number last year, that’s hardly the sort of robust growth that could explain record margins.

So CIBC’s economists dug a little deeper.

Their first theory was that perhaps higher-margin industries such as manufacturing, transportation, agriculture and forestry had taken on a greater share of the economy.

But as we’ve written previously, the country’s beleaguered manufacturing industry is only just beginning to emerge from the carnage it suffered during the Global Financial Crisis. And the other aforementioned sectors have also seen their shares of the economy fall in recent decades.

At the same time, low-margin sectors such as retail and construction have assumed greater importance to the overall economy. Both evidence the extent to which Canada’s debt-burdened consumers have been driving the economy, with the wealth effect from the country’s housing boom spurring spending in other areas.

Excluding the energy sector, high-margin sectors’ share of GDP has fallen by about 7 percentage points since 1997, to around 62%.

As such, record profit margins are actually more widespread than they might have been previously. Indeed, with the exception of the resource space, every sector in Canada is enjoying above-average profit margins relative to their long-term average.

So that still doesn’t clear up the mystery. But timing turns out to be key.

CIBC observes that since 2012, profit margins have expanded by nearly a full percentage point. That sudden strength helps narrow the focus to two factors in particular: falling labor costs and a lower exchange rate.

Growth in labor costs has decelerated sharply over the past two years, from 3.5% year over year in 2012 to 1% in 2014.

More important, the Canadian dollar dropped by about 13% from the beginning of 2012 through the end of 2014. And at current levels, near USD0.80, the loonie is down about 25% from its trailing five-year high of USD1.06.

As investors who benefitted from a considerable tailwind as the loonie climbed above parity with the U.S. dollar, it’s been dispiriting to watch the currency crumble.

At the same time, Canadian policymakers believe a lower loonie is crucial for kick-starting the country’s economy again. For instance, Mr. Poloz has repeatedly said that he believes a falling exchange rate will beget a virtuous economic cycle of rising exports, increased business investment, and more hiring.

Well, it looks like the decline in the exchange rate is starting to work some magic. CIBC estimates that the depreciation in the Canadian dollar may be responsible for the entirety of the margin expansion that’s occurred over the past two years.

Naturally, export-oriented sectors such as agriculture and manufacturing have enjoyed the biggest boosts to margins, as have the rail and truck subsectors of the transportation industry.

Of course, as practitioners of the so-called dismal science, CIBC’s economists also worry about whether profit margins will eventually suffer a reversion to the mean. The theory is that rising margins invite competition that eventually leads to their erosion.

In this case, however, the decline in the exchange rate is a factor that’s felt across the board. And on that basis, CIBC believes that for now record profit margins are fully supported by fundamentals.