Business insolvency filings skyrocketed in the third quarter of 2022 as the country grappled with continued interest rate hikes amid the highest inflation seen in decades.

According to the latest data from the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), business insolvency filings increased by 48.5% year over year in Q3 2022 – the sharpest increase in 35 years, with a total of 796 proceedings filed under the Bankruptcy and Insolvency Act (BIA).

The construction and accommodation and food services sectors had the highest insolvency rates, while the mining, energy and financial services sectors all saw decreases in insolvency filings.

The third-quarter spike in insolvency filings continued a trend observed in the first half of 2022, when insolvency filings increased by 26.3% over 2021 levels.

"We expect to see additional pressure on debtors and a subsequent increase in the number of business insolvencies as higher borrowing and input costs impact businesses still struggling to recover from the pandemic," CAIRP chair Jean-Daniel Breton said in a statement.

Economy Cools as Rates Rise

In December, the Bank of Canada increased the overnight lending rate by 50 basis points, bringing the interest rate to 4.25% in an effort to quell persistent inflation.

The central bank noted that Canada's GDP growth was stronger than expected in Q3 and the unemployment rate remains low. However, as consumer spending and the housing market continue to cool off, the bank predicted growth would "essentially stall" through the first half of 2023.

"Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target," the central bank said in a release.

Taking a Proactive Approach

The increase in insolvency filings in the first half of 2022 wasn't necessarily a bad thing, CAIRP noted. In the second quarter, 21.7% of business insolvency filings were proposals – indicating that businesses were developing payment plans to avoid bankruptcy.

"It is important to note that the increase in business insolvencies isn't all bad news," Breton said. "It means businesses are taking proactive measures to put themselves on a more stable financial footing."

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