Business bankruptcies in Canada approached pre-pandemic levels in the first quarter of 2022, jumping nearly 34% year-over-year, which some experts say could be the beginning of a growing wave of bankruptcies.
There were 807 business bankruptcies and proposals in the first quarter, compared to 733 in the previous quarter and 603 in the first quarter of 2021. Business bankruptcies remained significantly lower than normal during the pandemic thanks to government grants and loans , but the business community and pundits said the lull could not – and should not – last.
By comparison, bankruptcies and insolvencies in the first quarter of 2019 totaled 972, meaning the numbers for this quarter are still nearly 17% lower than the last full pre-pandemic quarter.
The question is whether insolvencies will rise to pre-pandemic levels and stay there – or if they will go higher.
According to the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), inflation and rising interest rates could further increase insolvency cases during the year.
Dan Kelly, president of the Canadian Federation of Independent Business, said he knows business bankruptcies will rebound from their pandemic lows, but he expects the numbers to continue to climb above pre-pandemic levels throughout the year.
Now that the subsidies are drying up, many business owners are trying to figure out if it’s worth staying open, Kelly said. Less than half of CFIB members are back in presales, he noted, and many are tens of thousands of dollars in debt.
“We’re going to have several tough quarters,” Kelly said, adding that the government could help ease the hangover by canceling some or all of the loans it made during COVID-19. “It could take a few years of calculation.”
But David Macdonald, senior economist at the Canadian Center for Policy Alternatives, has a more optimistic view.
Despite its current challenges, the Canadian economy is stable right now, he said, and that stability could help businesses get back on their feet, especially as summer is fast approaching, a good time of year for many sectors.
The latest spike in bankruptcies could just be a return to pre-pandemic normalcy, he said, not a sign of a coming tsunami.
Jean-Daniel Breton, president of CAIRP, said it was unclear what would happen next. It all depends on a variety of measurable factors, like supply chain issues, inflation and interest rates; as well as immeasurable factors like consumer and business confidence.
Kelly’s concern is warranted, Breton said, but he doesn’t think bankruptcies will spin out of control. Any backlog from the pandemic lull is likely to disappear over time, not all at once, he said.
The sectors with the largest annual increase in insolvency filings are construction and transportation and warehousing, the latter likely tied to rising gasoline prices, Macdonald said.
Inflation will certainly be a challenge for many businesses, Macdonald said, but it could actually be a boon for some industries.
However, a wave of bankruptcies significantly above pre-pandemic levels is not impossible, Macdonald said. If there is a recession, for example, deposits will likely increase.
Of course, bankruptcies don’t tell the whole story. Kelly noted that many small businesses don’t bother to file for bankruptcy, opting instead to simply close.
Rather, a bankruptcy filing is “funeral, not death,” he said, and the scale of the economic effect of the pandemic is harder to quantify.
Breton said struggling business owners can benefit from early intervention and even save their business from complete closure.
Insolvencies are part of the life cycle of a healthy economy, Macdonald said, and can help business owners exit a failing business less painfully.
“It should be positive to get out from under this debt burden,” he said.
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