In the fourth quarter of 2019, there were 35,155 consumer insolvency filings, according to Canada’s Office of the Superintendent of Bankruptcy. That’s the highest since 2010 and about 5,000 shy of the record reached in the third quarter of 2009. For the full year, over 137,000 Canadians declared bankruptcy, 9.5% more than the previous year – the fastest annual increase in a decade. Historically, such an increase in consumer bankruptcies was a result of weaker employment conditions following an economic slowdown. But today, one can hardly blame those bankruptcies on the wider economy – the Canadian unemployment rate is near record lows at 5.5%, compared to about 8.6% in 2009, and the economy is running near potential.
In our view, it’s more likely that the increase in insolvencies has been driven by the greater debt burden Canadians have taken on of late – the ratio of debt to disposable income in Canadian households has increased from 161% a decade ago to 176% today. Certainly, the lower rate environment has spurred more households to borrow, but the increase in household debt has also been driven by creative lending. For example, it’s now common for car dealers to coax customers to trade in their one-year old cars (and their associated loans) for brand new ones – and thereby extending the loan by dozens of months.
All this to say that while the hard data such as employment, GDP and corporate credit look healthy, we’re keeping a close eye on recent bankruptcy data, and hoping that it’s not our canary in the coal mine.