I had a number of calls today about the bankruptcy and insolvency data released this morning. Nationally, the total number of insolvencies in April slumped 38.7 percent from the prior month. Compared to the same time last year, the total number of insolvencies was down by 43.5 percent, with consumer insolvencies decreasing 43.1 and with business insolvencies down 54.8 percent.
The kneejerk reaction is to be surprised. We know the economy has entered the biggest recession since the Great Depression in March, so how could bankruptcy figures be falling for both businesses and individuals? The answer to this conundrum is two-fold: timing and policy.
First, filing for bankruptcy or insolvency does not happen overnight. In fact, it is typically the last resort after every other sensible avenue has been explored. As such, bankruptcy data is a lagging indicator. In other words, it shows where the economy has been, not where it is or where it is heading. Filings rise, but do so several weeks or months after the businesses run into trouble.
Second, governments and banks have taken unprecedented actions to help support individuals and businesses from such a path. For individuals, the CERB and other government programs are providing income support. Banks are allowing mortgage deferrals for up to six months. This has offset much of the income shock. It won’t be until the income support actions are phased out that the severity of the situation (financial strains related to unemployment) will be visible in the bankruptcy data. The delay offers an opportunity for the unprecedented fiscal stimulus to more robustly shore up the economy, limiting personal bankruptcies.
For businesses, the wage subsidies, as well as access to credit and liquidity programs are helping shield balance sheets from the COVID-shock. However, there is no doubt that business failures will materialize as time passes. Again, the state of the economy and strength of its recovery that will ultimately the number of insolvencies and bankruptcies.
Key economic releases today included the Canadian and US international trade numbers for April. To no one’s surprise, trade volumes collapsed. Roughly, two-thirds of the world economy was in self-imposed lockdown, both disrupting supply links and sinking demand.
Canadian exports plunged 30 percent in dollar terms and 20 percent after removing price impacts. The drop in autos (vehicles and parts) was stunning, with an 83 percent decline from the month prior. Imports fell by a lesser 25 percent in dollar terms, more than doubling the trade deficit to $3.3 billion in April. Imports of consumer goods fell 12 percent, with demand being shored up by elevated health risks.
The figures revealed that trade in some product groups actually rose in April. This was the case with pharmaceutical products, whose imports were up 9.7 percent, and textile products, whose imports surged 31.4 percent. Within the broader textile category, personal protective equipment (PPE) imports rose 67.1 percent to $491 million in April partly attributed to an increase in the number and price of face masks from China.
On a lighter note, alcoholic beverage imports also bucked the trend, rising 9.0 percent in April. At the same time, the elevated domestic demand for medical equipment, PPEs, diagnostic tools, and cleaning products resulted in a reduction in exports in April, after increases in March, with medical equipment and products exports down 10.6 percent after two consecutive gains.
On the other side of the border, US exports fell 25 percent while imports dropped 14 percent in April. However, since in the US imports are much larger than exports, the US trade deficit increased by a whopping US$7.1 billion to US$49.4 billion.
Again, the trade collapse is old news. The gradual global reopening of the world economy should see exports and imports rebounding in June and beyond. The devil will be in the details, however. The volume of trade is likely to remain low and recover only gradually because factories will only cautiously ramp up production given the expectations for subdued growth in demand.
Across the pond, the European Central Bank (ECB) surprised markets by increasing the size of their asset buying program by a larger than expected €750 billion to a massive €1350 billion. It also extended by six months the planned end date, now slated to occur in June 2021. This implies that the ECB will need to continue buying €25 billion of assets per week, their current pace, for another twelve months.
Across the other pond, the Chinese economy appears to be experiencing a gradual improvement in economic growth post-lockdown, at least as far as the official statistics are concerned (these are often viewed as being unreliable). As such, analysts often look at other high frequency indicators. For example, coal and steel inventories are steadily declining, pointing to rising industrial activity. The latest survey of services sector activity in China is also showing growth.
