Economic news

Canada Braces for Possible Wave of Business Bankruptcies

  • A fifth to a quarter have not paid pandemic-time govt support
  • Insolvencies rose 38% in first 11 months of 2023-official data

OTTAWA, Feb 1 (Reuters) - Thousands of Canadian small businesses face the risk of bankruptcy after the government ended pandemic-era support last month with the economy slowing at a time of high interest rates.

Small firms that employ fewer than 100 people are critical to the Canadian economy as they give jobs to almost two-thirds of the country's 12 million private workers. A spike in bankruptcies, which jumped 38% in the first 11 months of 2023, would weigh on economic growth, lobby groups and economists warn.

Last month, small businesses faced a deadline to repay interest-free loans of C$60,000 ($44,676) made available to each of them during the pandemic. Of the 900,000 who had taken the government support, a fifth have not yet repaid their loans, Finance Minister Chrystia Freeland said on Monday. The Canadian Federation of Independent Businesses (CFIB), a small-business lobby group, estimates a quarter missed the deadline.

Katherine Cuplinskas, a spokesperson for the finance minister said in an emailed response to a Reuters question that the Department of Finance did not expect there will be a negative impact on the economy on account of repayment of the loans given as support during the pandemic. She said loan recipients have long had full information on timelines and have been able to plan accordingly.

There were about 1.2 million small businesses with employees in Canada in 2021 and contributing over a third to the country's gross domestic product, according to the latest official data.

"There are tens of thousands, if not hundreds of thousands, of businesses that remain viable, but will not be able to outrun their debt," Dan Kelly, CFIB president, told Reuters, adding many debts could only be repaid by borrowing at a higher interest rate from banks.

Of those who repaid, CFIB estimates that about 225,000 took out a bank loan to do so, at a time when interest rates in the country are at 22-year high.

Those who did not get a loan but missed the deadline must make regular payments for two years at 5% annual interest.

"We do anticipate... a rise in insolvencies over the next six months or so," Stephen Tapp, chief economist at the Chamber of Commerce, said in an interview.

The Conference Board of Canada (CBC), an independent think tank, forecasts that consumer spending in 2024 on a per capita basis is expected to slump further from what was already seen last year.

CBC estimates first quarter corporate profits to nearly half to C$104.5 billion from a year ago, and the rest of the year will also be weaker than 2023 with companies hit by higher costs and drop in sales.

"Warren Buffett says when the tide goes out you see who is swimming naked," CBC's chief economist Pedro Antunes said. With the government support receding, the small businesses will be the ones exposed, he added.

($1 = 1.3430 Canadian dollars)

Reporting by Promit Mukherjee, editing by Steve Scherer and David Gregorio

Source: Reuters

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