New business creation in Canada has actually picked up slightly

...But the number of new businesses being formed still isn’t enough to lift us out of this period of sluggish growth

Entrepreneur standing in front of her new store with an “opening soon” sign

(Hero Images/Getty)

Last week, Matthieu Arseneau, an economist at National Bank Financial, recorded a rare sighting: animal spirits.

On June 29, Statistics Canada released quarterly estimates of business creation and destruction. The research is in the experimental phase, so StatsCan didn’t do much to promote the numbers. But it did say that if anyone was interested, he or she could request the spreadsheet. Arseneau did so and uncovered some good news. According to StatsCan, Canada’s business population grew 2% in the first quarter from a year earlier, the fastest pace since 2008. The number of companies in the oil-and-gas industry is shrinking rapidly, of course, but the decline is being outweighed by gains in most every other sector, especially agriculture and transportation. “This should dispel fears that the Canadian economy is a one-trick pony,” Arseneau wrote in a research note.

Bank of Canada Governor Stephen Poloz has been waiting a long time for this moment. He began his tenure three years ago with a story about why the recovery from Great Recession had been so lacklustre. Too many companies had been lost during the crash, putting pre-crisis rates of growth out of reach, he said. However, Poloz reassured the public that it was only a matter of time before the animal spirits of entrepreneurs were rekindled. All they needed was a little coaxing from low interest rates and a weak currency. “Mother Nature” would take care of the rest, he said.

Mother Nature has been cruel to the governor. A fitful recovery in the United States, a debt crisis in Europe, and wobbles in China all have undermined global economic growth and confidence at various points. And then oil prices crashed, forcing Poloz to drop his already low benchmark interest rate another half point in 2015 to avoid another deep recession. Only the hardiest entrepreneurs venture out in that kind of weather. But by the end of last year, the StatsCan data on business formation suggests a spike in courage.

Chart showing business entries and exits in Canada, 2013–2015

The chart shows the difference between births (entries) and deaths (exits) in the business population since the start of 2013. There were 140,430 companies created in the first quarter, better than the average (137,813) since the start of 2001, which is as far back as the data go. Fewer companies died in the first quarter than is typically the case: there were 117,730 exits compared with an average since 2001 of about 121,000.

It would be hasty to assume Canada’s entrepreneurs have fully rediscovered their swagger, however.

Canadians are creating companies less enthusiastically than they have in the past. In the early 1980s, the entry rate—the number of new companies divided by the total business population—was about 25%, according to a 2014 study by StatsCan. That rate is only around 13% now. Same thing for the death rate, which has slowed to about 11% from around 17% three decades ago. That’s not necessarily a good thing. Vibrant economies experience churn: unproductive firms get left behind as a new, fast-growing companies enter. The churn rate of Canada’s economy appears to have slowed.

New companies are important because they hire and invest at faster rates than existing firms. Poloz, Prime Minister Justin Trudeau and the premiers need to encourage as many entrepreneurs as possible to take the plunge. That’s because Corporate Canada still is in shock from the deterioration of commodity prices. The Bank of Canada’s latest quarterly survey of businesses shows that companies expect little sales growth over the next 12 months and that their investment intentions are stuck near the lowest levels since the Great Recession. And that was before the Brexit vote. Those animal spirits that Arseneau spotted may already have run away.