After a punishing wave of interest-rate hikes in Canada and the United States, the number of businesses failing to stay afloat has surged on both sides of the border, but bankruptcy filings suggest the financial strain has hit Canadian businesses faster and much more severely.
In October, the number of business insolvencies in Canada jumped by more than 60 per cent from the year before to nearly 500, according to numbers released by the federal Office of the Superintendent of Bankruptcy this week.
That’s also more than double the number of business insolvencies filed the same month in 2019. The insolvency measure includes both bankruptcies and restructuring proposals, a legal option in Canada that gives a business protection from its creditors while it repays a portion of its debt.
Business bankruptcies are spiking in the U.S., too, according to U.S. court system filings, but from a lower base, and have yet to rise above prepandemic levels. In the third quarter, business bankruptcies jumped 37 per cent from the year before, but were still 12 per cent lower than in the same quarter in 2019.
It’s another sign of a widening gap between the performance of the U.S. and Canadian economies.
Part of the explanation for the higher rate of business bankruptcies may stem from the nature of each country’s pandemic lockdowns and emergency government supports. Canada’s economy was shut down for longer, inflicting more damage to smaller businesses. Meanwhile, Washington sent US$930-billion in direct payments to households, a pandemic windfall that continues to energize the American economy.
But it’s also true that relative to GDP, Canada’s non-financial business sector has also borrowed more heavily than in the U.S., so that when interest rates climbed, businesses here felt the sting of higher debt-servicing costs more quickly.
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