FINWIRES · TerminalLIVE
FINWIRES

Canada's Credit Stress Is Rising, Not Breaking, Says National Bank

By

Total debt insolvency in Canada reached its highest level since the 2009 financial crisis in Q1, according to data from Equifax released on Wednesday, said National Bank of Canada.

This increase may seem alarming and raises concerns about the financial health of Canadian households. The bank asks if the situation is really as concerning as it seems.

To gain a clearer picture, National Bank analyzed data from the Office of the Superintendent of Bankruptcy, which tracks the total number of insolvency filings; bankruptcies and consumer proposals, across the country. This data also shows that the number of insolvencies reached its highest level since the financial crisis in Q1.

However, two adjustments are necessary to correctly interpret the trend in insolvencies, stated the bank. The first concerns seasonality, since the first half of the year is historically associated with a higher volume of insolvencies.

The second involves accounting for the strong population growth observed since 2009, as the Canadian population has increased by about 25% over the period.

Once the data is seasonally adjusted and expressed on a per capita basis, the insolvency rate remains well below the peak reached in the wake of the financial crisis and is even below its pre-pandemic level of 2019, the bank pointed out.

The upward trend observed since 2022, as such, reflects a normalization from an exceptionally low pandemic trough rather than a widespread breakdown in household credit. However this does not mean the situation should be downplayed.

The rise in the insolvency rate over the past year reflects a more fragile labor market, high interest rates, and a still-high cost of living, particularly for housing, food, and energy, which continue to put pressure on many households.

However, the data doesn't support the narrative of systemic credit risk suggested by some media headlines, added the bank. The most accurate interpretation remains more nuanced: financial strains are increasing, but their magnitude remains moderate by historical standards for now.

Related Articles

Treasury

US 2-Year FRN Auction High Discount Margin Falls from Previous Month, Demand Lower

The US Treasury's 2-year FRN auction hit a high discount margin of 0.089% on Wednesday, lower than the 0.103% high in the previous auction.The bid to cover ratio for the auction was 3.49, below the 3.52 ratio in the previous auction.Dealers represented 65.75% of the bids, with direct bidders at 0.20% and indirect bidders at 34.05%.For takedown, dealers took 26.84%, with direct bidders at 0.71% and indirect bidders at 72.44%.

Treasury

US 2-Year FRN High Discount Margin 0.089% vs 0.103% Previous; Bid/Cover 3.49 vs 3.52 Previous

Treasury

Bank of Canada Cannot Fix Youth Unemployment, Notes BMO

In a Tuesday speech, Bank of Canada Deputy Governor Nicolas Vincent highlighted the rise in long-term unemployment, especially for those aged 15-24 years, said Bank of Montreal (BMO).The share of the labor force in that age group who have been out of work for a year or more has risen to 1.6%. That's approaching the peaks hit in the wake of the 1982 and 1991 recessions, and is triple the long-run average, noted the bank.It's a very different story for those 25 and over, where the long-term jobless rate is 0.8%, which is right on the long-term average for that age group, stated BMO.Vincent explained that the rise for young people was due to demographic factors, the population surge in 2022-24,cyclical forces as young people are hit first in slowdowns, and structural issues such as employer caution around the implications of Artificial Intelligence.The key message in the speech is that the BoC needs to sort out what the main driver is, and can't just respond with lower rates immediately to such softness, added the bank.

$$CXY