Personal and business bankruptcy rates in Canada are rising, and will likely increase further as the full effect of the loonie's recent surge is felt.
In a report released Friday, CIBC World Markets said the number of personal bankruptcies rose by 3.5 per cent in September from the same month last year, when measured on a three-month moving average basis. They are now climbing at a pace not seen since early 2004.
For the first time since early 2002, bankruptcies among Canadian businesses are also edging higher. “Importantly, these numbers do not capture the impact of the most recent surge in the value of the dollar — a fact that, in all likelihood, will work to take the number of insolvencies in Canada even higher,” said CIBC economist Benjamin Tal, who wrote the report.
Some Canadian businesses, manufacturers in particular, are struggling with the rapid rise of the Canadian dollar which is squeezing their margins as their products become less competitive in foreign markets.
The Canadian dollar has risen steadily from a record low of 61.79 cents (U.S.) in January, 2002. The gains accelerated this autumn and it reached parity with the greenback in September. The currency did not stop there, topping $1.10 during Wednesday's trading session.
As of September, the number of business bankruptcies had risen just over 2 per cent, year-over-year, led by a 12 per cent surge in Quebec.
The CIBC report does not even include the most recent surge in the loonie, Mr. Tal said. “This impact will be felt mostly in 2008 — with overall business bankruptcies likely to rise by 5 per cent.”
The situation is similar for personal bankruptcies. Given the current momentum, CIBC expects 2007 will probably be the first year since 2003 to see an outright rise in the number people filing for personal bankruptcy.
Personal bankruptcies will climb by 2 per cent in 2007 and by more than 5 per cent in 2008, Mr. Tal said. The increase marks a change in direction, albeit a modest one when compared to previous cycles that saw massive waves of filings.
“We expect the sharpest increase to be in Ontario and Quebec due to the recent rise in the value of the dollar and its negative impact on the manufacturing sector in these two provinces,” he said. The number of individuals going bankrupt is rising in Ontario and Quebec, and if the rate in Alberta had not dropped 17.5 per cent, the national rate would already look very different.
Mr. Tal said there are other warning signs on the horizon, particularly in peoples' debt situation. For example, the gross writeoffs rate in banks' term loans and in personal lines of credit are both rising.
However, “So far, we have not seen any notable deterioration in the mortgage portfolio,” he said.
