Canadian credit is normalizing after an epic binge, and it’s presenting some red flags. Office of the Superintendent of Bankruptcy (OSB) data showed a downtick for Q3 insolvency filings. The drop was mostly seasonal, with the volume still trending towards pre-pandemic levels. That may sound like a return to normal, but there’s one big change—insolvency composition. Fewer households need help this time, but business insolvencies are at a 10-year high.
Canadian Insolvencies Pulled Back, But They’re Still Trending Higher
Canadian insolvencies pulled back slightly, but the trend is still unfavorable. Insolvencies hit 31,600 in the third quarter, down 2.2% from the previous one. This represents an 18.5% increase compared to the same quarter last year. Quarter-to-quarter movements are volatile, so the higher annual growth is a bigger concern.
Taking a peak at annual growth unfortunately reinforces the erosion in credit quality. There were 121,600 insolvency filings in the 12-months ending in Q3 2023. This represents a whopping 22% growth compared to the previous period. Much like mortgage delinquencies, a normalization is expected. An easy credit environment delayed and expanded borrowing. This doesn’t necessarily mean borrowers were healthier, but it favored larger debt piles.
Zooming out still shows the uptick people are concerned with, but it’s not quite as alarming. Higher rates contribute to payment stress via higher payments. However, lower rates also facilitated a borrowing binge driving higher payments as well. Rates are double pre-pandemic volumes, but insolvency filings are still lower. Even with the rapid population growth.
“The monthly data are quite volatile, even after adjusting for seasonality,” explains Shelly Kaushik, an economist tracking the trend at BMO.
Adding, “still, there’s been a clear uptrend in insolvencies after the initial pandemic drop, and an acceleration once the Bank started raising rates in 2022.”
The Trend Is Not Canada’s Friend
Total filings are lower but don’t dismiss the trend, warns the economist. A shift in filing composition will result in a big change in how rising insolvencies are felt.
“Total insolvencies are largely made up of consumers, but under the headline is a more worrying trend: business insolvencies have risen beyond their pre-pandemic level,” explains Kaushik.
Indeed. Regulatory filings reveal business insolvencies just hit a new 10-year record. When viewed in context with other weak entrepreneurship indicators, things look worse. For example, fewer businesses are opening—an issue often observed during housing bubbles.
Households are doing better than they were pre-pandemic. At least in terms of insolvency filings. That can change fast though, with the bank warning things will get worse.
“…we likely won’t see the worst of the cumulative impact of higher rates on the data for quite a few more months yet,” she says.
Higher interest rates are causing more pressure on budgets, but that isn’t the only issue here. Highly indebted Canadians already redirected much of their consumption to shelter. Especially when it comes to young adults, whose spending typically drives economic growth. Less money to spend at businesses means fewer businesses, and fewer businesses means fewer jobs. That can amplify a downturn much more than households that spent a little too much, but still have a source of income.