This year is shaping up to be the third sub-par year in a row for the global economy. The slowdown has not been deep, but long and painful, and corporate bankruptcy statistics tell the tale.
Canada’s corporate sector is doing better than others, given our economic performance in the past two years. In 2002, there were 9,458 corporate failures in Canada, the lowest since 1989. Records were set in 1992 and 1996, when there were about 14,000 bankruptcies in each year, following the recession of 1990-91 and the slowdown of 1995, respectively.
Canada’s exporters are understandably interested in Canadian bankruptcy statistics, but they are even more preoccupied with corporate failures abroad. That is because business failures in foreign countries represent Canadian exporters’ customers, and if those customers go bankrupt while the cheque is in the mail, exporters may be left holding the bag.
There were more than 38,000 corporate failures in the U.S. last year, down slightly from about 40,000 in 2001. That sounds like a lot of companies, but in fact these figures are well below those seen in past slow-growth episodes. For example, there were more than 71,000 U.S. corporate failures in 1991, and more than 53,000 in 1996.
These figures help to put the recent experience into perspective. In large part, our disappointment with U.S. economic performance in the past two years stems from the truly spectacular performance that preceded it. Looking back to true economic recessions, such as 1990-91, which were then followed by the so-called “jobless recovery,” we find circumstances that were, by this measure of corporate health, more than 50 per cent more stressful than those experienced recently.
The same cannot be said for continental Europe, however.
For example, Germany saw about 39,000 corporate failures last year, more even than the much-larger U.S. economy, and far above the 11,000 cases seen in 1992. France is having a similar experience.
To a large extent, these statistics reflect structural forces, rather than cyclical ones – Europe is just now grappling with the same wave of corporate restructuring that affected North America in the early 1990s.
Meanwhile, Japan had more than 19,000 bankruptcies in each of 2001 and 2002.
Given that Japan has been locked in recession almost continuously for more than 12 years, the rate of business failures has been rising steadily. Stresses have reached the point where the Japanese culture of protecting business is gradually breaking down.
Major companies are systematically culling their supplier networks, boosting the bankruptcy rates, not to mention the unemployment rolls.
The bottom line? Corporate death rates are running high around the world, both because of long-term structural forces and because the global slowdown that began in 2001 is proving to be persistent and stressful.
Given the uncertain economic outlook, there is every reason to expect continued high rates of business failures this year and next.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. You can reach him at spoloz@edc.ca)
