Staying alive: As recession deepens, businesses keep bankruptcy at bay - Metro US

Staying alive: As recession deepens, businesses keep bankruptcy at bay

OTTAWA – The ability of Canadian businesses to survive the worst recession in decades is giving hope that the rebound from current massive job losses will be stronger than widely expected.

One of the biggest surprises of the downturn – unique to Canada – is that as the economy has slumped, the number of businesses declaring bankruptcy has also declined.

This has hardly ever happened before and although Canada is only seven months into a recession expected to last another half-year, it suggests that the corporate destruction of past recessions won’t be a major factor this time around.

“This is the story of the recession so far,” Benjamin Tal of CIBC World Markets said Tuesday.

“The recession is not over, so I would expect to see (business bankruptcy) numbers rising before it is over. But the fact we’re starting from a very low point suggests that the number will not be very high compared to previous recessions.”

The federal Office of the Superintendent of Bankruptcy reported last week that insolvencies in March totalled 14,244, up 51 per cent from March of last year. But while swelling numbers of individuals succumbed to their debts, business bankruptcies were down 10 per cent.

By comparison, five months into the downturns of 1982 and 1992 corporate bankruptcies were 15 to 20 per cent higher than pre-recession levels, Tal said in an analysis.

In the United States, he added, business bankruptcies now are about 40 per cent higher than a year ago.

For the first three months of 2009 – in which the Bank of Canada estimates the economy contracted at an annualized rate of 7.3 per cent, the worst on record – business bankruptcies were actually down 14 per cent from the corresponding period in 2008.

Not all Canadian businesses have been fortunate. This year has seen several high-profile Canadian bankruptcy filings, notably Nortel Networks (TSX:NT) and AbitibiBowater (TSX:ABH).

And consumer insolvencies were up 57 per cent in March over a year ago.

However, Tal says Canadian businesses, after years of profit, entered the recession with plenty of cash. As well, many have aggressively downsized – laying off workers to cut operating costs. In fact, over 300,000 jobs have disappeared in the past six months.

While that is bad news for workers, Tal says it portends well for the recovery, which most economists, including the Bank of Canada, forecast will begin late in 2009.

Fewer corporate bankruptcies could result in a quicker rebound in the employment market, which normally trails recoveries, says Tal.

“There’s been a little bit of pre-emptive downsizing that is making the situation worse now, but it means the recovery will be faster because it is much easier to re-hire when you still exist,” he observed.

Tuesday brought another indication that Canada is surviving the recession better than its southern neighbour.

Canada Mortgage and Housing Corp. projected the recession will cause housing starts to fall about 33 per cent this year to 141,900, but predicted that building will edge up in subsequent years – although not to the 200,000-plus rates seen in the past several years.

While that shows significant weakness, it is far ahead of the U.S. situation, where starts have crumbled to one-quarter of pre-recession levels. Nor are the Canadian numbers far off the demographic fundamentals, including population growth.

“Housing market activity will begin to strengthen in 2010 as the Canadian economy recovers, bringing housing starts more in line with demographic fundamentals over the forecast period,” said CMHC chief economist Bob Dugan.

Dugan forecasts housing starts in the 150,000 to 180,000 range over the next four years.

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