Sure insolvencies are up, but they started super low

Insolvencies are on the rise among both households and businesses, while the recent surge largely reflects the exceptionally low levels that prevailed during the pandemic, tougher economic and financial conditions could yet drive those numbers above their pre-pandemic mark, TD Economics says.

In a new report, the bank’s economists examine the recent trends in insolvency filings — pointing out that, while both personal insolvencies and debt restructuring rose rapidly last year, up 11% and 21%, respectively, this came off a very low base.

“This trend in personal insolvencies reflects a normalization from the ultra-low levels of the pandemic. In both absolute and per capita terms personal insolvencies remain well-below their 2019 levels,” it said. “Despite the increase last year, total consumer insolvency filings remained 27% below their level in 2019.”

Moreover, the report noted that personal bankruptcies actually declined last year, down 10% from the previous year, and are down 50% from pre-pandemic levels.

It’s a strong increase in debt restructurings that is driving the rise in insolvency activity, as the government pandemic supports disappear and household costs rise due to the combination of inflation and higher interest rates.

Looking ahead, the pressure on households will only mount as the effects of the Bank of Canada’s recent rate hikes continue to work their way through the economy, driving insolvencies still higher.

“Financial headwinds will likely persist or even intensify in 2023 and into 2024, likely pushing consumer insolvencies above their pre-pandemic average,” the report said.

On the business side, it’s an increase in bankruptcies that is driving the insolvency activity — which was up by 40% in 2022, and is now just 10% below pre-pandemic levels, TD noted.

Again, this partly reflects a return to normal in the wake of the pandemic, and also the tougher economic and financial conditions facing many businesses over the past year.

Most notably, sectors that were hard hit by the public health restrictions that accompanied the pandemic — such as accommodation and food, entertainment and recreation, retail trade, transportation, and other services — have seen the biggest rise in insolvency filings, the report said.

“In these industries the number of bankruptcies is either close to or even above its pre-pandemic average,” TD noted.

However, sectors that benefited from higher commodity prices over the past year — such as mining and energy — have fared much better, both relative to 2021 and to the pre-pandemic period, it said.

In the year ahead, some of the forces that drove business insolvencies last year — such as inflation, labour shortages, and supply chain issues — should ease, the report noted. Yet, at the same time, weakness on the consumer side may weigh on profitability.

“All in all, given some lingering headwinds, it appears that business insolvencies will continue trending higher this year, but likely at a slower pace relative to 2022,” it concluded.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.