For years, the quiet success story in Canadian business was the steady drop in the number of business failures, a trend that accelerated during the pandemic thanks to the gush of government stimulus spending.
Now reality, propelled by high interest rates, has hit home, with business insolvencies in March soaring to the highest level since 2011, and some economists warning of further pain ahead.
While March typically sees an increase in business bankruptcies and proposals, the number of insolvencies was up 37 per cent from the same period the year before. That followed months of similar increases. “There is little doubt that with the support factors removed, the underlying trend in insolvencies is on the rise,” Bank of Montreal chief economist Doug Porter wrote in a note.
Business insolvencies had returned to their prepandemic trend in early 2022, just as central banks embarked on the steepest rate hike cycle in decades. That brought an abrupt end to an era of cheap money which had enabled many troubled businesses to keep the lights on.
Now, even if the Bank of Canada holds interest rates steady, the lag effect of past hikes and instability in the global financial system mean credit conditions are likely to tighten further.
In the bank’s financial system review, released this week, it warned small businesses are at particular risk because of their reliance on bank lending. A sharp tightening in lending conditions would “lead to financial stress for these firms,” it warned.
Decoder is a weekly feature that unpacks an important economic chart.
Jason Kirby