Business insolvencies start to creep up as pandemic relief programs end

The number of business insolvencies in New Brunswick and across the country is starting to creep back up again after being lower than normal during the pandemic, according to March and first quarter of 2022 data from the national Office of the Superintendent of Bankruptcy. 

Two businesses in New Brunswick filed for bankruptcy in March, bringing the total to seven insolvencies for the first quarter of the year.

The businesses include two corporations and five individual businesses — meaning a person who has incurred at least half of their total liabilities from running a business.

The numbers are up from three insolvencies in the final quarter of last year and zero in the first quarter of 2021.

During the pandemic, insolvencies dropped off to next to nothing in some provinces due to government support programs, said Fred Bergman, a senior analyst with the Atlantic Provinces Economic Council.

Now that some of those programs are ending — including the Canada Emergency Response Benefit, the Canada Recovery Benefit, the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy — and others that will be ending in July, the number of insolvencies can be expected to increase, Bergman said.

The numbers may be even higher than usual within the next year or two, he predicted.

As support programs end, Bergman noted, businesses also face higher costs due to inflation, upward pressure on wages and higher payments on debt, tied to rising interest rates.

"There's a lot of things pointing towards a bit more trouble on the financial front for some businesses and households."

The top three sectors with insolvencies nationwide in March, according to federal statistics, were construction, hospitality and food services, and transportation and warehousing.

There are well-known challenges for each, said Bergman.

In the construction industry, building supply prices have been very high, he said, and it's been hard to get supplies and labour.

Lumber prices are "well above historic norms," of about $300 US per thousand board feet, said Bergman.

"The last time I looked it was over $1,000 US," he said.

That's down from a peak of $1,600 US.

More failures expected in hospitality, food services

Besides that, a lot of construction projects were delayed due to the pandemic. That meant companies weren't fully paid — from the prime contractor on down to sub–sub–contractors.

"A lot of construction businesses within that supply chain go under because the cash flow is just not coming in."

Restaurants and hotels were especially hurt by pandemic restrictions on travel and indoor dining.

Bergman expects to see more business failures in the hospitality and food services sector because it is still facing significant issues.

Employment data is "coming back," he said, but still "nowhere near" where it was pre-pandemic.

Shipping companies are directly affected by supply chain issues — the recent lockdown in parts of China being one example.

In addition, in the last few months this sector has also been affected by higher energy prices.

"Whether it's marine fuel for a cargo ship … diesel fuel for truck transport … gasoline for a local delivery vehicle for Amazon — they're all facing higher costs."

Insolvency numbers will likely peak next year, said Bergman.

"If you go back and look at the 2011 data, you start to get a picture of what's coming down the pipeline."

The pandemic created a "pretty significant shock," he said. And the "negative signals" are stronger than they were after the 2009-2010 recession.

Not all 'doom and gloom'

In 2011, there were 4,775 business insolvencies across the country. That compares to 2,480 in 2021.

Four in ten Atlantic Canadians, or 43 per cent, said rising interest rates could drive them closer to bankruptcy, according to a report released in April by MNP, a consulting and accounting firm that tracks debt in Canada. 

That was a "significant" increase of six percentage points from their December monthly consumer debt index survey.

"If you're the one that's just squeaking by," said Bergman, "the impacts are very real."

The big picture, however, is not "doom and gloom."

"It's not as concerning as you think," he said.

Yes, the number of insolvencies, both business and consumer, are "likely to creep up, but they won't get huge."

He pointed to Equifax's latest data for households. The delinquency rate on consumer debt, such as credit cards, but excluding mortgages, was only 0.86 per cent nationally. In New Brunswick, it was around 1.23 per cent.

"That's a very, very small percentage," he said.

There's also some "wiggle room" for continued business growth.

That's because during the pandemic, the number of active businesses increased by about five per cent.

Between 2020 and 2021, said Bergman, the number of active Canadian businesses grew by 48,545, to almost 900,000.

"You're probably still going to see the number of active businesses continue to grow," he said, but maybe not quite as much."