The stage is set for a surge in defaults and insolvencies in 2025. Before the Trump administration took office, the economic forecast was cautiously optimistic, predicting a modest recovery after a challenging 2024. Inflation had decreased and was expected to reduce further. Similarly, interest rates were projected to fall and result in lower household debt and increased consumer confidence. But, early optimism has been eclipsed by heightened uncertainty.
Due to their significant debt levels and sensitivity to economic fluctuations, highly leveraged industries, such as real estate, retail, and manufacturing, are particularly vulnerable to financial distress. As insolvency professionals analyzing the current economic landscape, TDB Restructuring Limited urges caution for companies in these industries and recommends swift and decisive action. Businesses that have not yet implemented risk mitigation strategies are encouraged to start immediately.
Economic uncertainty due to U.S. tariff policies
The proposed 25% tariff on Canadian imports by the United States has introduced significant economic uncertainty. According to the central bank, a trade war could result in Canada’s economy contracting by 2.5 to 3% after the first year. A wider interest rate gap between Canada and the U.S. could also lead to a weakening of the Canadian dollar.
Industries such as sugar and confectionery, a food and beverage industry subsector with over 80% of its sales dependent on the U.S. market, will have a hard time competing south of the border, leading to reduced exports and significantly lower profits. The retail and manufacturing industries will also face serious risks, including declining consumer demand. This will especially impact companies that produce consumer discretionary products as consumers tighten their finances, reassess budgets, and explore cost-cutting measures to manage rising costs or debt repayment.
In short, if tariffs become a reality, Canada faces the strong potential of a recession. What if Canada retaliates with tariffs? That, too, is not ideal. Such action will lead to consumers facing higher prices, interest rates and inflation, together with an economic slowdown.
Elevated risk in over-leveraged sectors
The outlook is equally bleak for the real estate sector. Due to shifting market dynamics and financial strains, the sector is expected to face continued challenges, especially in the commercial and industrial markets.
Economic uncertainty affects confidence and spending habits, creating additional pressure on businesses. Mid-sized businesses, especially those without significant working capital and reserve funds, are particularly vulnerable to high interest rates and challenging capital markets. Companies struggling to adapt to changing market demand will need to choose between restructuring or consolidating with stronger industry players.
Anticipated continuation of insolvency trends into 2025
Last year marked a 15-year high in insolvency filings. Given the prevailing economic challenges and the threat of tariffs, restructuring professionals expect this historic number to continue into 2025.
As businesses confront these mounting challenges, the impetus for proactive financial management and strategic planning is ever more critical. The risk of inflation rising further if Canada retaliates with tariffs and the potential decline of the Canadian dollar due to the interest rate gap with the U.S. further complicates the financial landscape for businesses. Implementing robust risk mitigation strategies now can make the difference between navigating successfully through economic turbulence or facing potential insolvency. Companies must assess their financial health, reevaluate their capital structures, and remain agile to adapt to the evolving economic landscape. The time to act is now.
