A steep drop in business insolvencies in Canada

As the overall Canadian economy improves Crédito y Caución expected that, in the near term, the trend of Canadian payment defaults will continue to improve.
Analisis Credito y Caución
Madrid - 26-jan-2011

According to Statistics Canada, the Canadian economy progressed slower than expected in Q3 of 2010, as lower exports and a weaker housing sector impeded growth. GDP grew 1% on the previous quarter, after a gain of 2.3% in Q2. On average, economists had expected a growth rate of 1.5 %, compared to the USAs 2.5% GDP growth. Domestic demand increased 0.9%, with more investment in plant and equipment: up 6.5%. Manufacturing, mining and the public sector were the main sources of growth in the third quarter, while increased consumer spending also contributed positively.

According to the Office of the Superintendent Bankruptcy Canada, the total number of business and consumer insolvencies [defined in the graph below as bankruptcies and proposals] decreased 26.5% year-on-year in September 2010, with consumer insolvencies dropping 26.4%, and business insolvencies 29.2%. For the year from September 2009 to September 2010, business insolvencies decreased 21%, thanks mainly to fewer business failures in the transport, warehousing, retail trade, manufacturing, construction, and agriculture sectors.

In October 2010, the Expected Default Frequency indicator for listed companies in Canada dropped again compared to the previous month, to 93 basis points, and ending 382 points lower than at its peak in February 2009. The Canadian EDF has reached its lowest level in more than two years.

Improving payment trends

Insolvency statistics, by their nature, tend to reflect earlier cycles, and so the falling number of business insolvencies in Q2 and Q3 of 2010 indicates a continued improvement in payment trends, across most commercial sectors, from 2009. As the overall Canadian economy improves Crédito y Caución expected that, in the near term, the trend of Canadian payment defaults will continue to improve.

The manufacturing sector remains one of the sectors with the highest delinquency rates. Furthermore, wholesalers position as middlemen also makes them susceptible to cash flow issues caused by late payments, and this can often lead to subsequent delays in their own outgoing payments. The natural resources and agriculture sector showed low delinquency rates, as would be expected since they are among the more stable sectors, while real estate, with its many hidden failures, tended to understate the actual extent of its delinquency rate.

The Bank of Canada currently expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0% in 2010, 2.3 % in 2011 and 2.6% in 2012. Overall, economic growth in Canada is expected to become less reliant on household spending and government stimulus measures, while business investment and exports should pick up some of the slack. The Bank noted that output in the economy has now exceeded its pre-recession peak, and that all 400,000 jobs lost in the recession have been regained. However, unemployment remains high, at 7.9% in October 2010, reflecting a rise in the number of people looking for work. In comparison, in the United States only about one fifth of the jobs lost in the recession have been regained.

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