Equifax Canada has revealed new data indicating a significant shift in credit usage among businesses during the first quarter of 2023. These numbers highlight growing financial stress in the industrial and financial trades, raising concerns about the stability of the Canadian economy. In this period, businesses’ outstanding balance on bank-issued instalment loans decreased by 2.4% compared to the first quarter of the previous year, settling at $12.9 billion. However, credit card balances grew by 15%, and lines of credit increased by 11%.
Jeff Brown, head of commercial solutions at Equifax Canada, commented on the concerning shift in credit usage, stating that it is unprecedented in recent years and acts as an early warning indicator. He mentioned that instalment loans are typically used for growth and expansion, and a decrease in their usage coupled with a rise in credit card spending is often a sign of financial instability. Brown added that the Bank of Canada’s rate hikes might have contributed to this trend as businesses may have sought credit products that don’t lock them into fixed repayment periods and provide more interest-rate flexibility.
Pedro Antunes, chief economist at the Conference Board of Canada, acknowledged that general conditions for businesses are getting tougher. He expressed concern over businesses relying on short-term credit products, seeing it as a negative sign. While bankruptcy levels aren’t catastrophic yet, they have surpassed pre-pandemic levels, indicating the challenges businesses are facing as the economy slows.
Equifax also highlighted how the decline in instalment loans and the shift towards credit card usage could hinder businesses’ growth potential and their ability to make substantial investments. Brown mentioned that this shift is a relatively new trend and could be an experimentation phase for businesses awaiting interest rates to normalize. He also noted that banks might be more stringent with lending due to the aftermath of the U.S. banking crisis.
However, over time, continued credit card usage could become a dangerous habit, leading to accumulating debts. A decline in small business spending can have trickle-down effects, and delinquencies have already increased to near pre-pandemic levels. Brown emphasized the importance of reversing this trend to prevent further adverse consequences.
Looking ahead, Antunes expects household spending to slow down, impacting businesses. He explained that inflation and interest rates are eroding the savings households had accumulated during the pandemic. The Conference Board’s confidence index shows that businesses lack optimism and are likely to hold back on spending and investment.
Equifax highlighted that industrial and financial trades are particularly showing signs of financial stress, which could have ripple effects on the overall economy. Moreover, the first quarter witnessed a slowdown in new business openings, a concerning trend. Unlike the past two years, there was a noticeable dip in new business establishments in 2023. In Ontario, new business starts were down 16.5% year over year, while in British Columbia, the drop was 14.2%, 11.4% in Alberta, and 7.5% in Quebec. Brown anticipates this trend to continue throughout the summer as economic conditions weaken due to higher interest rates, resulting in potential aspiring entrepreneurs delaying their business ventures until borrowing costs become more affordable.
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