May is usually the quiet month when it comes to insolvencies but it is not trending that way anymore.
Instead, a “sharp” increase in insolvencies, May suggests that households are struggling more than ever with onerous debt and high interest rates.
Insolvencies, which include bankruptcies and proposals to renegotiate loans, rose 12.3% in May from April and are up 30.9% from the same time last year, according to data from Innovation, Science and Economic Development Canada.
They are now at their highest level since the start of the pandemic, with proposal numbers cresting above the pre-Covid era, said Charles St-Arnaud, chief economist at Alberta Central, in an analysis of the latest figures.
The Bank of Canada’s (BOC) move to come off the sidelines after a five-month pause has sent a signal that some economic pain will be needed to tame stubborn inflation, presently at 3.4%, leading investors to raise bets on a hard landing for the economy.
The central bank is worried that the Canadian economy is still running too hot for inflation to return to its 2% target and that if it waits to act, inflation expectations could rise, making matters worse.
“The question is whether the continued strength of the labour market, with the very low unemployment rate, and the vast amount of saving accumulated during the pandemic will continue to provide some relief,” St-Arnaud said in his note.
Inflation has even overtaken the Canada Food Guide, says the federal department responsible for benchmark guidance on healthy eating.
Less than a third of Canadians can afford minimum daily servings of fruit and vegetables. It said: “The Food Guide was released prior to the recent rising cost of food due to inflation and does not currently acknowledge the growing issues of food availability and affordability.”
The economy becomes more sensitive to increased borrowing costs just as consumers start to feel the effects of the BOC’s latest rate hikes. The central bank lifted its benchmark rate to a 22-year high of 4.75% this month and is expected to tighten further in July or September.
The BOC says it takes between six and eight quarters for rate hikes to sink in.
In Canada, insolvencies numbered 11,262 in May, down 4.1% compared with 2019. Of that, bankruptcies totalled 2,735, down 42.6% relative to 2109. However, proposals totalling 8,561 in May were 22.6% higher relative to 2019. Year-to-date, insolvencies are now up 27.6%.
Insolvencies rose above their pre-pandemic levels in Manitoba, British Columbia, Alberta, Ontario and Saskatchewan — all provinces with rates of debt-to-disposable income higher than the average.
Manitoba reported a 35% jump in insolvencies relative to 2019, the highest increase among the five provinces where insolvency rates rose above pre-Covid levels. In B.C., insolvencies jumped 17%, in Alberta 7.3%, Ontario, 2.9% and 0.3% in Saskatchewan.
Insolvencies remain well below pre-pandemic levels in P.E.I., where they are down 27.8%, Quebec, down 20.4%, New Brunswick, down 18.8%, Nova Scotia, 18.3% and Newfoundland, down 18.1%.
However, no province has been spared from rising numbers of proposals to renegotiate terms of loans that have surpassed pre-Covid marks, the economist said.
“This suggests that an increasing share of households are facing financial stress,” St-Arnaud said.
St-Arnaud attributed the shifting insolvency outlook to record levels of household debt, weakening purchasing power and a series of increases to the BOC’s benchmark lending rate, which sets the baseline costs for borrowing.
Further, the Calgary-based economist said he expects insolvencies to continue to rise this year since higher interest rates have yet to fully filter through to household borrowing.
“The question is whether the continued strength of the labour market, with the very low unemployment rate, and the vast amount of saving accumulated during the pandemic will continue to provide some relief,” St-Arnaud said.