Canadian insolvencies are growing at the fastest pace in 10 years

Last week Statistics Canada posted the latest data on consumer and business insolvencies in Canada. The numbers got some attention in the press, but not nearly enough. Insolvency statistics help us understand the effects of two decade's worth of consumer credit binging and the imbalances this has caused in Canada's economy. And given the inversion of the yield curve - an early warning of an impending recession - it's time to start monitoring insolvency numbers. Here's what we found in data that is buried deep in Stats Can's database.

On a year-over-year basis, consumer insolvency growth reached the highest levels since the financial crisis in July 2019. In October they remained elevated. The first spike in July was a bit surprising, but it was well above the trend. However, third quarter data is showing us that insolvency growth is now trending.

Insolvency in Canada is defined by the Bankruptcy and Insolvency Act as the inability to meet "obligations as they generally become due." Consumers or businesses are insolvent when they are either unable to pay their debts or their debts in dollar terms are larger than all of their assets in dollar terms combined. On the other hand, bankruptcy is declared in court. So, by the time bankruptcy rolls around things have probably been pretty hairy for a while.

While the latest growth numbers are comparable to what we saw during the financial crisis, there are a few important caveats. Generally speaking, the insolvency numbers tend to trend closely with unemployment figures in Canada. When people lose their jobs it's almost inevitable that some of them will go insolvent. But, since about the beginning of 2018 things have decoupled from this trend. On the chart above you can see how insolvency growth is rising faster than unemployment growth. The unemployment figures are not capturing some of the underlying weakness in the economy that is causing folks to go insolvent. It may be that we are seeing folks go insolvent while still employed, either because they're carrying too much debt, their wages are not keeping up, or maybe they're working fewer hours. We'll know more in the coming months as more data comes in.

Another difference between the latest data and the data from the financial crisis is that consumer proposals are growing faster than insolvencies. The idea that proposals outnumber insolvencies is, of course, not out of the ordinary. But the pace of proposal growth compared to insolvency growth is extraordinary. On the chart above you can see that proposals grew between 20% to 30% on a year-over-year basis during the third quarter of 2019, but insolvencies grew well under 20%. Bankruptcy growth is near zero. It will be interesting to see how this plays out in the coming months and whether proposals end up clearing up some of the financial distress consumers are experiencing at the moment. Alternatively, this proposal growth we are currently seeing in the data could be an early indicator of something worse to come.

Given the concerning consumer insolvency data above, one might think that the business insolvency data is reflecting the same or more. However, the data is currently showing us that business insolvencies are relatively low.