Insolvencies on the rise amid interest rate squeeze: Former Bank of Canada economist

A former Bank of Canada economist says the pace of rising household insolvencies could spell trouble for the broader economy down the line.

Insolvencies fell during the pandemic as people saved money, but Charles St-Arnaud, chief economist at Alberta Central, told BNN Bloomberg that the trend is now “completely reversed,” with insolvencies compared to 2019. – and the rise is faster. than expected.

“What’s starting to become known is fashion,” St-Arnaud said in a television interview on Tuesday.

“Insolvencies are a lagging indicator of the economic cycle. They usually have a peak 12 months after the start of a recession. We haven’t started a recession,” he continued. “The question is, when will they peak and how bad is it?”

In particular, St-Arnaud said that the rate of proposals – where a financial institution allows a customer to renegotiate their debts – is in place in all Canadian provinces.

Bankruptcies are still relatively low, and St-Arnaud suggests this may be thanks to Canada’s strong labor market, as banks are more willing to renegotiate a loan if people have we still That dynamic could change, and he warned that bankruptcies could rise if more people lose their jobs and banks become more cautious about their ability to repay their loans.

“That’s where the negative feedback loop becomes more severe in the real economy,” he said.

His comments come days ahead of a scheduled Statistics Canada report on the country’s labor market, which is being watched closely for signs of softening, now more than a year into its tightening cycle. Bank of Canada interest rate aimed at lowering inflation.

Rising rates are putting pressure on consumers, and St-Arnaud said it’s an effect of monetary policy that the central bank needs to watch out for.

“For the Bank of Canada, this is part of … some of the collateral damage in the fight against inflation,” he said. “The question is how bad is it, and are we starting to see a negative feedback loop in the real economy?”