The Office of the Superintendent of Bankruptcy just released the June 2013 Insolvency statistics. This is a monthly report that is a major economic indicator that is often cited when trying to determine the health of the economy.
In June’s report we find:
- On average the Canadian rate of insolvency has fallen by a total of 3.1% over the past 12 months period;
- Saskatchewan had the biggest reduction with a 14.0% reduction in total filings over this same period;
- Alberta had the second biggest decline with a 10.1% reduction in total insolvencies.
One of the most interesting things we have seen in Alberta is the total bankruptcy filings decreased by 19.4%, but the total number of consumer proposals filed increased by 8.4%.
So what does this all mean?
Many people look at the overall insolvency rates when trying to assess the overall health of an economy and if we took a cursory look at these numbers things appear to be very positive. Overall there are less people needing to turn to a formal insolvency process to deal with their debt. This charge appears to largely be led largely by Saskatchewan and Alberta but has occurred in a number of areas including Ontario, Manitoba and Newfoundland.
So it appears that things are improving for the average consumer, at least based on insolvency rates, but are things as good as they seem?
There was an interesting study released by Equifax commending on Canadian Consumer Credit Trends. Some of the most persuasive findings were as follows:
- Across Canada, total debt excluding mortgage has increased steadily it terms of the total balance outstanding.
- Both the number and total balance of national credit cards held by consumers has increased for the first time in over 2 years.
- There has been a continued increase in bank installment loans.
- The limits for revolving loans have continued to increase, as have the outstanding balances.
- Mortgages have grown at a very robust pace (7.4%) since the second quarter in 2012.
More locally they identify that Edmonton has had the fastest growth in both the average balances of their debt but also the average limit that is available. There is a similar pattern in Calgary, but not to the same extent.
As identified by Equifax, “the average debt per consumer is increasing across the Country in all regions,” but here in the West we have led the way.
So we have a decrease in insolvency rates, an increase in debt. Both of which are larger in Alberta and Saskatchewan than in most other areas of the country. Some see this as a positive. They argue that as the economy strengthens, we see fewer people defaulting on their existing obligations. As a result there are few people needing to file for bankruptcy or some other formal method of dealing with their debt. We also see that banks are more willing to lend. Arguably because they see a bright future ahead with lots of opportunity and a confident consumer who is more willing to take on debt for the same reasons.
But let me remind you of one thing: Canadian interest rates are significantly lower than normal. Right now the Overnight interest rate that is set by the Bank of Canada is sitting at 1.00%. It has remained unchanged since midway through 2010. While it has increased a little since the lows seen in 2009, it is still artificially low!
So my prediction: The increase in debt that we have seen, when coupled with an interest rate that has nowhere to go but up. I predict a tremendous amount of pressure to be placed on the average Canadian consumer. The result will be a dramatic increase in the total number of insolvency, but more importantly a vast number of Canadians who will struggle trying to service a debt that could have been prevented.
My advice: Recognize the trend. Start to look at your debt now. Identify areas in your life where you and your family can cut back. Use the money saved to pay down your consumer debt. Do this before the interest rates increase and continue to work to pay down your debt, don’t be one of the millions of Canadians who are headed in the wrong direction. If you are unable to make the changes necessary to reverse this pattern, it may be a good idea for us to talk. As you can see in Alberta, more and more people are being proactive with their debt and looking for options like a consumer proposal that will help them to get in front of their debt and not simply end up being another statistic.
As I reflect upon these findings there is one thought that comes into my mind: Don’t be like the Grasshopper. I don’t know if your remember the story about The Grasshopper and the Ant. But if you recall the Ant labored in the field diligently all through the summer so that he could put away enough food for the winter and the Grasshopper didn’t. The moral of the story being that it is best to prepare now for tomorrow.