Macro-economic Indicators

Background

Several studies have found that key economic factors such as the interest rate have significant impact on the frequency of business failures in the economy, although such impacts are frequently subject to a time lag between the point when the factor is observed and the point that business failures begin to increase.

According to Edward Altman, an authority in this field, a company's propensity to fail is heightened by the cumulative effects of reductions in factors such as real economic growth, stock market performance, money supply growth, business formation, and price level changes.

A trend analysis of Canadian bankruptcy statistics covering the period 1976-1987, carried out by economist Jocelyn Martel, found that an increase in the Bank of Canada rate was followed one to four quarters later by an increase in the number of bankruptcies. Similarly, a decrease in the Bank of Canada rate was followed one to four quarters later by a decrease in the number of bankruptcies. Similar findings were reported for changes in the money supply "M2", the economy-wide indicator of the amount of credit available. (M2 consists of currency and demand deposits, less private sector float plus personal savings deposits and non-personal notice deposits.) As the money supply decreased, bankruptcies increased over a four quarter lag. Finally, Martel found that changes in the Gross Domestic Product (GDP) were strongly correlated with the rate of bankruptcy (i.e., decreases in GDP were associated with increases in the number of bankruptcies).

Note In contrast with findings based on US data, however, Martel found no identifiable association between the performance of the stock market (i.e., as measured by the TSE 300 index) and the rate of bankruptcy in Canada.
Caution Macro-economic indicators may not be effective at identifying specific entities that are most likely to be affected by adverse economic conditions but they can be important indicators of economy-wide increases in the probability of business failure. In such circumstances, accountants and auditors should have a heightened degree of concern about other factors which, in combination with these indicators, may suggest that the risk of business failure faced by an entity is approaching a point requiring remedial action to counteract potential problems or their disclosure in the financial statements.

Use

Each of the macro-economic indicators can take on one of three possible values: increasing, stable, or decreasing. The value for a particular indicator is changed by clicking on one of the radio-buttons beside the indicator text.