/Posthaste: Lessons learned from Canada’s mysterious rise in insolvencies

Posthaste: Lessons learned from Canada’s mysterious rise in insolvencies

Good Morning!

So what’s up with rising household insolvencies in Canada? In September they saw a 19% spike from a year earlier, the biggest annual gain since 2009. So far this year, there have been 102,023 consumer insolvencies, the second-most for the first nine months of a year in records dating back to 1987. True, the gains come from low levels, but they are accelerating at a pace that’s normally seen in times of economic distress.

“Obviously, this is not the typical cyclical climb in household credit stress,” write CIBC economists Benjamin Tal and Avery Shenfeld in a report this week.

We are not in a recession; unemployment before November was near multi-decade lows. Nor is this an Alberta problem. Ontario saw just as big a spike as this province which is enduring a prolonged downturn. The only provinces that escaped the national increase were Quebec and Saskatchewan.

Tal and Shenfeld say clues to why we are seeing higher insolvencies in what looks like a healthy environment — and a lesson for investors, lenders and monetary policy makers — can be found in the type of debt experiencing rising write-off rates.

Mortgage debt, where arrears have “trended steadily downward,” is not the problem. “It’s the performance of non-mortgage consumer debt that is the canary in the coal mine we need to watch for turning points in the credit cycle,” says their report.

More specifically debt where rates are tied to the prime rate that rose with Bank of Canada hikes in 2018. CIBC says writeoffs are up sharply on both unsecured lines of credits (ULOCs) and secured lines of credit (HELOC), but credit card debt, where rates are not tied to monetary policy, is not seeing this trend.

“Households have been shifting debt from credit cards to lines to save on interest costs but were then squeezed as rate on ULOCs began to climb.”

Tal and Shenfeld say there is a clear trend that increases in delinquencies are coming from interest-rate-sensitive products and much of that increase took place after rate hikes by the Bank of Canada pushed up the prime rate.

The takeaway is that the Canadian “economy, with its legacy of higher household debt, would be more sensitive to interest rate hikes than in the past.”

“If raising the overnight rate to only 1.75% could set off a climb in insolvencies, before any major job losses have been seen, it’s clear that taking rates to anywhere near what was historically neutral, or even where some models might currently put neutral, could prove to be overkill,” the economists conclude.

Here’s what you need to know this morning:


  • Bank of England releases interest rate decision
  • Ahmed Hussen, Minister of Families, Children and Social Development and Minister responsible for Canada Mortgage and Housing Corporation, Steve Clark, Ontario Minister of Municipal Affairs and Housing and John Tory, Mayor of Toronto, make an announcement in Toronto related to housing in Ontario
  • RCMP hold news conference in Edmonton about charges laid in $15-million money-laundering operation linked to illegal online cannabis sales
  • Notable earnings: Nike
  • Today’s data: Canadian wholesale trade, U.S. existing home sales, current account balance

Women alive today will not see world gender parity in their lifetime, was the conclusion of a report that created a lot of buzz this week. This year’s World Economic Forum’s Global Gender Gap Report calculates that worldwide gender parity is still 99.5 years away, or more than a lifetime for most of us, as the chart by Bloomberg below shows. One of the major battlegrounds for parity is economic participation where the gap widened in 2019 to 57.8% from 58.1% the year before. This gap will take now take 257 years to close, compared to the estimate of 202 years in 2018. Technological advances have hit women with a “triple whammy”, says the WEF. There are more women in the roles hit hardest by automation, not enough of them are entering professions, often technology-driven, where wage growth is greatest and lack of care infrastructure and access to capital limits them from becoming entrepreneurs. “As a result, women in work too often find themselves in middle-low wage categories that have been stagnant since the financial crisis 10 years ago,” the report said.


— Please send your news, comments and stories to [email protected]. — Pamela Heaven @pamheaven

With files from The Canadian Press, Thomson Reuters and Bloomberg


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