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In spite of the strong economic headwinds triggered by the COVID-19 pandemic, business insolvencies declined by nearly a third, or 29.4 per cent, year-over-year (YoY) to 474 in the second quarter of 2020, reported Statistics Canada. This drop in numbers came at a time when most enterprises had been shut for a month or more and those that were still open were facing costlier business adversities.
By the third quarter of 2020, business insolvencies were “relatively stable” as they remained unchanged at 474, registering a decline of 13.8 per cent YoY.
Businesses in the construction industry, with a decline of 32.1 per cent YoY, reported the sharpest drop insolvencies in Q2 2020, as per StatCan. This was likely triggered by the loan approvals, as a Canada Emergency Business Account (CEBA) survey found that the construction industry had secured the biggest slice of CEBA loan approvals in April and May at 14.1 per cent.
COVID & Business Insolvencies In Canada
During the 2008 financial crisis, Canada saw business insolvencies soar by 11.3 per cent YoY in the fourth quarter of year 2008. The number hit a record high of 816 in Q1 2009. Similarly, the oil price crash in 2014 led to insolvencies climbing by one-quarter to 779 between Q3 2014 and Q4 2014 in the country.
The coronavirus pandemic had undeniably thrown a massive wrench in the Canadian economy’s growth last year. The Q2 2020, at 11.3 per cent, recorded the sharpest fall in Canada’s real gross domestic product (GDP) in its near-70 years of quarterly data collection history. Businesses too saw lowered net income before taxes and operating revenues in Q2 2020.
©Kalkine Group 2020
However, the business insolvency numbers were down for most Canadian industries in the second quarter of 2020, reported StatCan. Most businesses which did file for insolvency last year reportedly came into the pandemic already burdened with financial trouble.
The decreased number of business insolvencies amid the pandemic in Canada could also suggest that enterprises were simply looking forward to more government aid or were trying to gauge if they will be able to cope with their debt levels. Lowered borrowing costs for businesses could also explain this decline in numbers partly.
The Canadian Survey on Business Conditions found that nearly 44 per cent, or over two-fifths, of enterprises in the country were unable to take on anymore debt in Q3 2020, which indicates that insolvencies may rise in the upcoming quarters of 2021 if these businesses don’t see financial improvement.
