Business bankruptcies in Canada moved closer to pre-pandemic levels in the first quarter of 2022, jumping almost 34 per cent year-over-year in what some experts warn could be the start of a growing wave of failures.
There were 807 business bankruptcies and proposals in Q1, up from 733 in the previous quarter and 603 in the first quarter of 2021. Business bankruptcies have stayed significantly lower than normal during the pandemic thanks to government subsidies and loans, but the business community and experts have been saying the lull couldnt and shouldnt last.
In comparison, bankruptcies and insolvencies in the first quarter of 2019 totalled 972, meaning this quarters numbers are still almost 17 per cent down from the last full pre-pandemic Q1.
The question is whether insolvencies will rise back to pre-pandemic levels and stay there or whether they will go higher.
According to the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), inflation and rising interest rates could push insolvency fillings up further as the year progresses.
Dan Kelly, president of the Canadian Federation of Independent Business, said he knew that business insolvencies would climb back up from their pandemic lows, but he expects the numbers to keep climbing above pre-pandemic levels as the year progresses.
Now that the subsidies are drying up, many business owners are trying to figure out whether its worth it to stay open, said Kelly. Less than half of CFIB members are back to pre-sales, he noted, and many are tens of thousands of dollars in debt.
Were in for several rough quarters, said Kelly, adding that the government could help ease the hangover by forgiving some or all of the loans it gave out during COVID-19. It could be a couple years of reckoning.
But David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, has a more optimistic outlook.
Despite its current challenges, the Canadian economy is steady right now, he said, and that stability could help businesses get back on their feet, especially since summer is around the corner, a strong time of year for many sectors.
The latest uptick in bankruptcies could just be the return to pre-pandemic normal, he said, and not a sign of a coming tsunami.
Jean-Daniel Breton, chair of CAIRP, said theres no telling what will happen next. It all depends on a variety of measurable factors, like supply chain problems, inflation, and interest rates; as well as on immeasurable factors like consumer and business confidence.
Kellys concern is justified, said Breton, but he doesnt think bankruptcies will spiral out of control. Any backlog from the pandemic lull is likely to shake out over time, not all at once, he said.
The sectors with the biggest yearly increase in insolvency filings were construction and transportation and warehousing, the latter likely linked to rising gas prices, said Macdonald.
Inflation will certainly be a challenge for many businesses, said Macdonald, but it could actually be a boon for some industries.
However, a wave of bankruptcies significantly above pre-pandemic levels is not impossible, said Macdonald. If there is a recession, for example, then filings will likely go up.
Of course, bankruptcies dont tell the whole picture. Kelly noted that many small businesses dont bother to file for bankruptcy, instead choosing to simply close.
If anything, a bankruptcy filing is the funeral, not the death, he said, and the full scope of the pandemics economic effect is harder to quantify.
Breton said struggling business owners can benefit from early intervention, even saving their business from complete closure.
Insolvencies are part of the life cycle of a healthy economy, said Macdonald, and can help business owners exit a failing company less painfully.
It should be positive to get out from underneath this debt burden, he said.
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Canadian businesses bankruptcies surge and some fear this is just the beginning - Toronto Star
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