Consumer insolvencies in Canada are set to soar over the next two years as rising unemployment takes its toll on heavily indebted households, according to a new forecast from Toronto-Dominion Bank .
Personal insolvencies are likely to rise to a record 150,000 or 160,000 this year and next, up from an already high 116,000 in 2008, TD economists say.
"What you are talking about is that consumer insolvency is significantly higher than in past recessions," said deputy chief economist Craig Alexander.
(Personal insolvencies include people filing for bankruptcy as well as "consumer proposals" for renegotiating unmanageable debt loads. Since the 1990s, people owing less than $75,000 could seek such proposals.)
Canadians entered this recession with considerably higher debt loads than in the past, Mr. Alexander pointed out. As long as personal disposable income was rising, the higher debt loads were not a problem.
But now, with rising unemployment, incomes are not keeping pace with the rise in personal debt, leaving households more vulnerable than ever to not making ends meet.
And even though consumers will begin scaling back dramatically on the amount of credit they borrow, their incomes will suffer for years as the national unemployment rate rises to about 10 per cent, and comes down ever so slowly, TD argues.
The result is that insolvencies will rise sharply this year, and stay high for a few years, he said.
Right now, personal insolvency in Canada is running at about 4.3 individuals per 1000 over the age of 15. Mr. Alexander expects that ratio to rise to about 6 per 1000 consumers.
That's sharply higher than in the 1990-91 recession when the ratio was almost 3 per 1000, but back then, consumers could not take advantage of the "proposals" option to renegotiate their debt.
Even after the recession is over and growth has resumed, high debt levels and persistent unemployment will mean the ratio will stay above 5 per 1000 - or about 140,000 to 150,000 insolvencies per year, TD says.
People linked to the manufacturing sector will likely experience more insolvency than in other sectors, but the phenomenon will be spread across the country, the TD report says.
Still, much of TD's expectations for soaring bankruptcies is linked to the bank's forecast for a stubbornly high unemployment rate. Other forecasters don't expect unemployment to reach 10 per cent or stay high for as long as does TD.
In a new forecast from Bank of Nova Scotia, economists predict the unemployment rate will average 8.8 per cent this year and 9.3 per cent next year, after taking into account recent layoff announcements.