As recession fears soar, this key risk is coming back to earth

Recession fears are never far away these days, as shown by last week’s market turbulence.

Concerns that one negative shock could tip North America deeper into a downturn sent stocks spiralling last week and investors remain on edge this morning ahead of a week packed with United States data.

“However, of the myriad risks facing the Canadian economy, we may be able to dial down the concern over one threat: business bankruptcies,” says Moody’s Analytics.

As threats go that one has been considerable.

After lower than normal numbers during the years of pandemic aid, business insolvencies have surged over the past 19 months.

“At its most perilous point in early 2024, the number of bankruptcies reached levels not seen since 2009,” said Moody’s director of economic research Brendan LaCerda.

The spike aligned with the deadline for repayment of pandemic aid loans.

Canada Emergency Business Account program lent nearly $50 billion to over 570,000 businesses and while that just represents about 5 per cent of non-mortgage debt to firms, the load grew as interest rates rose, said Erik Johnson, senior director of economics at BMO Capital Markets.

About 30 per cent of businesses paid back the government loan before the first deadline at the end of 2023 and another two-thirds expect to repay it before the final deadline at the end of 2026, he said.

“That leaves one-quarter of the initial recipient pool at elevated risk of insolvency over the next two years. This is one of the reasons that business failures have ramped up,” he said.

Businesses in Ontario and Quebec struggled the most. These two provinces maintained COVID-19 restrictions longer than other regions and the rise in interest rates has been especially painful for Ontario, with its expensive housing market. Insolvencies here more than doubled pre-pandemic averages, said Johnson.

The good news is that recent data indicates this trend is reversing — and more quickly than expected, said Moody’s. The number of monthly bankruptcies have fallen about 40 per cent from their peak in Quebec and 50 per cent in Ontario.

In another sign that businesses are holding their own, a Statistics Canada survey showed that the number of businesses continued to grow in 2023.

Moody’s says the concern now is where the bankruptcy rate settles compared with early 2023 levels.

“Ontario appears to be normalizing slightly above that mark, but it is too early to tell for Quebec,” said LaCerda.

Conditions should start to favour businesses toward the end of the year as the Bank of Canada cuts interest rates and consumer demand picks up, he said.

“At the very least, we can breathe a sigh of relief that the spiralling rate of business bankruptcies has sharply reversed course in recent months,” said LaCerda.