It’s time to talk about Canada, because let’s face it, bankruptcies are usually not a good thing.
Canada’s economy has been decelerating as the lagged impacts of its own interest rate hiking cycle have begun to hit in earnest. Gross domestic product (GDP) in the fourth quarter barely budged relative to population growth This matters because it means growth per person is contracting. This is not a good thing for an economy that, like the United States, is leveraged.
Why Bankruptcies Are Rising in Canada
So, as you might expect, bankruptcies in Canada have been rising. The surge at the end of January 2024 that you see on the chart coincides with the end of federal and provincial pandemic support. But it’s not entirely that, as bankruptcy filings have been steadily increasing. Higher borrowing costs, coupled with slowing consumer demand, are the ultimate source of the trend. The companies most impacted include those in the retail, housing, accommodation, food and recreation sectors.
The Bank of Canada is clearly starting to worry, as it cut rates in the first week of June. It may be too late though.
In the same way that there were lags on the way up for rates negatively impacting Canada’s economy, so too will those lags occur on the way down. The second-round effects of a slowdown in Canada on the broader market (especially in the U.S.) must be considered. Although the U.S. economy is showing some resilience with modest growth in consumer spending, the Canadian and U.S. economies are interdependent, and slowdowns in the Canadian economy can cause disruption in markets across the border in the U.S.
What Comes Next
Because Canada is one of the United States’ top trading partners and U.S. exports account for a big part of Canada’s imports, a slowdown of the Canadian economy could possibly lead to a reduced demand for U.S. exports.
In addition, an economic slowdown in Canada might also reduce investor confidence and affect financial markets in the U.S. As more Canadian businesses fail and more insolvencies occur, investors may become risk-averse, leading to higher credit spreads or even lower equity prices.
Economic problems in Canada would also increase cross-border unemployment: Many U.S. firms operate in Canada, and deteriorating economic conditions could lead to layoffs and reduced economic activity in cross-border operations. Additionally, such layoffs could have spillover effects on the U.S. economy.
What’s the bottom line to all this? I’m not arguing that we will have a systemic collapse because of Canada, but in the same way that it is experiencing a sudden pickup in bankruptcies, so too could a similar dynamic happen to the U.S. This would either be due to our own interest rate lags, or because of Canada’s slowing economy directly impacting our own.
So yes, Canada is in trouble. And I think we are too.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
