Just over 3,500 firms declared bankruptcy during the first 10 months of 2010 – 26 per cent below the rate seen in the same period of last year, and less than half the average level of the past twenty years. The 3.4 bankruptcies per 1,000 businesses in 2010 was by far the lowest on record.
“In some ways, Corporate Canada has never been stronger than it is right now,” says Benjamin Tal, Deputy Chief Economist at CIBC. “Better-than-expected profitability and a reluctance to spend in recent years has left Canadian businesses sitting on a record amount of cash and confident about the future. Corporate Canada’s decision to quickly downsize during the recent recession not only allowed it to withstand the downturn but has also allowed it to ramp up its hiring at a much faster clip than we’ve seen stateside.”
The recent revision of the employment data by Statistics Canada revealed that the country is 30,000 jobs short of the pre-recession peak. At the current rate of job creation it will take no more than a few months to completely close the gap. In the U.S., with the level of employment no less than 5.5 per cent below the prerecession level, it will take 55 months to return to pre-recession levels at the current pace of job creation.
Mr. Tal explains that despite the fact that both countries have already closed the GDP gap, Canada’s notable outperformance in job creation has been driven in part by the different trajectories seen in the path of business bankruptcies in the two countries.
“In the U.S. the number of business bankruptcies has risen at a rate not seen since the 1970s, but there has been no similar story here in Canada.
“Not only is the number of business bankruptcies low, but it continues to fall at a rate not seen before. The 2008-2009 recession was the only downturn on record that saw the number of business bankruptcies in Canada drop and even now they are falling at a year-over-year rate of 30 per cent – much faster than the pace seen in any other recovery. And despite the fact that today there are 30 per cent more businesses in the Canadian economy than in the late 1980s, there are also 50 per cent fewer bankruptcies.”
The report notes that the ability of Canadian firms to stay in business during the recession was, in part, a result of some well-timed defensive steps taken by its business leaders. Unlike the situation in the U.S. or during other post-war recessions, Corporate Canada was able to tackle reduced demand and increased borrowing costs by more quickly rationing and downsizing – as opposed to waiting too long and being forced into plant closures.
“In the earlier part of the recession, jobs in Canada were disappearing faster than in any other recession,” adds Mr. Tal. “And most of these jobs were lost due to downsizing – not bankruptcies. This distinction is important since re-hiring by downsized but existing companies during the recovery occurs much faster than hiring by new firms. And that’s exactly what we have witnessed during the current recovery with overall employment reaching pre-recession levels faster than in any other cycle.”
All provinces have seen the number of business bankruptcies fall over the year ending October 2010 – with British Columbia leading the way with an astonishing 43 per cent fewer bankruptcies than during the same period in the previous year. Ontario, Manitoba and Saskatchewan also saw business bankruptcies decline more than the national average.
Alberta saw the number of business bankruptcies fall by only nine per cent during this period – likely a lagged effect of the slowing activity in the energy sector. By industry, the improvement over the year ending October 2010 was relatively uniform with all industries seeing a notable decline in business failures.
Change in Business Bankruptcies By Province Nov 09-Oct 10 vs. Nov 08-Oct 09
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/bkpty-20110203.pdf
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For further information: Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, [email protected]; or Kevin Dove, Communications and Public Affairs at 416-980-8835, [email protected]