If the stubborn strength of Canada’s labour market is dismaying to you – and for central bankers and many economists, it is – then you got some good news this week. In the form of, well, bad news.
(Yeah, it’s a complicated moment to be an economic tea-leaf reader.)
Statistics Canada reported that the number of active businesses in the country fell by 0.4 per cent in November. It marked the fourth decline in five months, going back to last summer.
The trend is significant – it’s the worst run since 2015, excluding the COVID-19 pandemic and its government-imposed shutdowns. And it raises a major red flag for the labour market, which has continued to post strong job growth despite the surge in interest rates that has otherwise slowed the economy.
A research note from National Bank of Canada chief economist Stéfane Marion noted that, historically, changes in full-time employment closely track the trend in net growth in active businesses. When the business population goes into decline, job creation, understandably, typically goes with it. The downturn in active-firm numbers is a strong sign that the bottom is falling out of our late-cycle hiring boom.
Change in the number of businesses and
full-time employment in Canada
Five-month percentage change
Active businesses
Full-time employment
12%
Pandemic
8
4
0
-4
-8
-12
2015
2017
2019
2021
2023
SOURCE: NATIONAL BANK OF CANADA
Change in the number of businesses and
full-time employment in Canada
Five-month percentage change
Active businesses
Full-time employment
12%
Pandemic
8
4
0
-4
-8
-12
2015
2016
2017
2018
2019
2020
2021
2022
2023
SOURCE: NATIONAL BANK OF CANADA
Change in the number of businesses and full-time employment in Canada
Five-month percentage change
Active businesses
Full-time employment
12%
Pandemic
8
4
0
-4
-8
-12
2015
2016
2017
2018
2019
2020
2021
2022
2023
SOURCE: NATIONAL BANK OF CANADA
“This suggests a very tangible slowdown in full-time employment in the months ahead,” Mr. Marion concluded.
It is jarringly odd that this could be seen as good news. And yet in our current circumstances, it is.
While the Bank of Canada has been rapidly raising interest rates over the past year in order to pour ice water on a badly overheated economy, and thus ease inflation pressures, the resilience of the labour market has stood as the biggest obstacle in achieving the bank’s objectives.
Even as high rates have dug their claws into an increasingly wide swath of the Canadian economy, employment in an already extremely tight labour market has continued to grow – by nearly 250,000 in the past three months alone. Statistics Canada’s January employment report, which showed a 150,000-job jump, renewed fears that the Bank of Canada would have to raise interest rates further still to bring excessive labour demand under control.
But the slumping active-business numbers suggest that the job numbers can’t defy gravity much longer. The foundations for job growth – an increasing number of active employers – simply isn’t there anymore.
Indeed, the downturn in the business count is a sign that we’re beginning to see the next-stage effects of interest-rate increases – which the Bank of Canada has been talking about as it raised rates over the past year.
“We are accustomed to looking for the effects of higher interest rates on housing, on vehicle sales and on business investment by existing companies. What these data show is that interest-rate increases also slow down the process of supply creation from new or young companies, too,” said former Bank of Canada governor Stephen Poloz, perhaps Canada’s most notable proponent of the active-business count as a go-to economic indicator.
“I like these data because they show the dynamism around growth,” he said by e-mail Wednesday. “We have a churn of around 40,000 firms per month – in and out – but in a growing economy, creations exceed closures by just a little, so the population of companies grows.”
Statscan’s business count includes figures for temporary closings and reopenings of previously existing businesses, as well as for permanent closings and for the entry of newly created companies. One thing that particularly caught Mr. Poloz’s eye within the November numbers was the new entrants: They slumped to their lowest in 16 months.
“This would be related to concerns about recession, and of course the cost and availability of capital – credit conditions are very challenging for young companies right now,” Mr. Poloz said.
While that’s not particularly surprising given the steep interest-rate increases of the past year, it does present another layer of economic implications. The creation of new firms, in this regular churn of business openings and closings, is not only significant for the potential of employment growth, but also a rough yardstick for the pace of innovation and productivity. The old firms that close their doors are typically inefficient operations, while the new businesses that take their place often bring new and more productive technology and processes with them.
We’re certainly seeing rising numbers of precarious businesses forced into insolvency as debt costs rise and the economy slows. The latest data from the Office of the Superintendent of Bankruptcy Canada show that business bankruptcies in the fourth quarter of 2022 were up 26 per cent from the third quarter, and 38 per cent from a year earlier.
But low counts of new businesses are, ultimately, more problematic for the economy. They suggest a slower pace of productivity upgrades – which, by extension, weighs on the potential for supply growth in economy. It suggests that as the Bank of Canada is applying the brakes on demand for goods and services over the relatively short term, higher interest rates will also slow the pace of growth in the economy’s potential – and, to some extent, weigh on the capacity for recovery once the current slowdown passes.