The recent weakness in oil prices is starting to heighten consumer financial distress, according to a new report from CIBC World Markets Inc.
A new report from the bank that was published today reveals that the total number of insolvencies in Canada rose by 1.2% through the six months ending this past February. This marks the first increase since the recession that followed the financial crisis of 2008-2009. However, within that group, the number of personal bankruptcies actually declined by 4.7%. The overall increase is due to a 9% jump in the number of consumer proposals, in which indebted consumers negotiate to repay only a portion of their debt.
“In the past, the growth in the number of proposals was of little importance given their relatively small size. That, however, is changing,” the report says, as proposals now account for half of all insolvencies, which is a record high.
Looking at the regional data, the report notes that “the damage from lower oil prices is starting to show”; the number of insolvencies is up by 11% in Manitoba and Saskatchewan, and by 6.5% in Alberta. This is the worst showing since the recession. Conversely, the number of insolvencies in Ontario fell by almost 7% during the period, the report indicates.
CIBC says that there are reasons to believe that the situation in Alberta is going to deteriorate in the months ahead. The number of proposals in the province rose by a cumulative 24% during the six months ending February, and by 30% on a smoothed year-over-year basis. “That trend is likely to lead to a higher insolvency rate in the coming quarters,” the CIBC report says.
For the country overall, the report suggests that insolvencies can be expected to rise along with interest rates. “Given the increased sensitivity of Canadian households to higher interest rates, it is reasonable to expect that, as opposed to previous cycles, the upcoming interest rate tightening cycle will lead to a moderate increase in the insolvency rate, as the negative impact of increased debt financing costs will offset any positives on the unemployment front,” the report concludes.