While the current economic situation has led to an increasing rate of personal bankruptcies, CIBC World Markets reports that business bankruptcies in the country are actually on the decline.

In the year ended March 2009, business bankruptcies fell 4.4% compared to the previous year, and no less than 14% during the first three months of 2009. The bankruptcy situation across all industries, with the exception of services, wholesale trade, and manufacturing, saw things improve. Alberta and Quebec are the only Canadian provinces to see business bankruptcies rise, but this increase has been offset by double-digit declines in other regions.

The situation, says CIBC, is in stark contrast to what's currently happening in the U.S., as well as what has happened in previous recessions. Benjamin Tal, Senior Economist and Author of the report, suggests that this implies most firms are turning to downsizing instead of plant closures. "If sustained," he adds, "this response will have significant implications for the nature and speed of the recovery in the job market."

Putting the situation into perspective, Tal points out that in both the recession of 1982 and the one of 1991, Canada registered 16 and 15 business bankruptcies per 1,000 businesses, respectively. This year, that number is less than six.

Unfortunately, personal bankruptcies are climbing, rising 57% year-over-year and 21.5% during the year ended March 2009.

"Over the past 30 years," Tal says, "the correlation between personal and business bankruptcies has been 70 per cent. Today, the correlation is negative.

He continues: "This disconnect is also very visible when comparing the current trajectory of Canadian business bankruptcies to the one seen south of the border. The number of U.S. business bankruptcies is now rising by no less than 40 per cent on a year-over-year basis, completely breaking the otherwise tight relationship between the patterns of U.S. and Canadian business bankruptcies."

Some argue that the business bankruptcy situation in Canada is simply slow to react to the economic climate. But Tal holds that this recession is very different from the last two we've experienced. From a timing perspective, he says we saw business bankruptcies being 15% and 20% above their pre-recession levels five months into things. In 2009, five months in, business bankruptcies in Canada are 10% below their pre-recession level.

"At least for now, corporate Canada has been able to tackle reduced demand and increased borrowing costs by rationing and downsizing as opposed to outright plant closures," Tal reiterates. He adds that while jobs are being lost due to downsizing, it's important to note the distinction between downsizing and outright closures. "Re-hiring by downsized but existing companies during the recovery can occur much faster than hiring by new firms," he explains. "So, as opposed to previous recoveries, this time around we may not have to wait for business bankruptcies to recover before we see employment rising again.

"The resiliency of business bankruptcies bodes well for the recovery in the labour market in 2010," Tal concludes.

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