Good morning,
Signs are beginning to appear that debt problems in Canada are on the rise.
The number of Canadian insolvencies in November hit a high not seen since March 2020, a month of widespread lockdowns at the beginning of the pandemic.
There were 9,784 insolvency filings in November, the highest number in 32 months, and 17.5 per cent higher than a year ago, according to numbers recently released by the Office of the Superintendent of Bankruptcy.
“This is the first time we have seen numbers close to pre-pandemic levels,” said Michelle Statz, a licensed insolvency trustee at Bromwich + Smith.
Soaring inflation and rising interest rates have taken a toll on household finances, and now the strain is starting to show up in the numbers.
Charles St.-Arnaud, chief economist at Alberta Central, said in a note that November’s increase was the first after two straight months of declines, suggesting that the rising trend seen in the spring of 2022 could be returning.
Insolvencies, which include bankruptcies and proposals, a renegotiation of terms with creditors, climbed 4.7 per cent in November from the month before.
Despite November’s increase, insolvencies still remain below pre-pandemic levels. However, proposals are up sharply over the past year and are now above their pre-pandemic levels in B.C., Alberta, Saskatchewan and Manitoba.
“This situation suggests a rise in households struggling with their debt load,” said St.-Arnaud.
British Columbia, Nova Scotia, Ontario and New Brunswick saw the biggest increases in insolvencies year over year at 32.5 per cent, 27.4 per cent, 23.9 per cent and 15.6 per cent respectively.
According to CIBC’s annual financial priorities poll, a quarter of Canadians said they took on more debt in 2022. Among the top reasons were the increased cost of living, expenses exceeding income and the higher cost of borrowing.
St-Arnaud says insolvencies are likely to rise in coming months as record levels of household debt, declining purchasing power because of decades-high inflation and the steep rise in interest rates put more pressure on household finances. As the economy slows further there is likely to be a rise in unemployment, he said, which will push more households into insolvency.
The question, he says, is whether the strength of the labour market with its almost historically low jobless rate and the savings accumulated during the pandemic will continue to provide relief.
Unfortunately, Canadians may only have begun to feel the bite of higher borrowing costs.
With the Bank of Canada expected to raise its key rate to 4.5 per cent this month, TD Economics predicts that the debt service ratio will hit a record high of 16 per cent by the second half of this year, surpassing the pre-pandemic peak of 15 per cent.
With interest rates forecast to remain at higher levels over 2023, TD expects much of Canadians’ pandemic savings will go to paying debt costs.
