Insolvencies surge in Canada as interest rates rise and inflation bites

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Business and consumer insolvencies are rising as rising interest rates and crushing inflation fuel economic uncertainty, an insolvency industry group says.

In the second quarter of 2022, business insolvencies increased by 30.9% compared to the same period last year, and by 26.3% compared to the first six months of 2022, said the Canadian Association insolvency and restructuring professionals (ACPIR).

Consumers are also under pressure. CAIRP data shows there were 25,266 insolvencies in the second quarter, up 10.5% from the same period last year and 9.2% from the previous quarter, which represents the “highest volume” in two years. They are up 32% compared to 2020.

The rising number of insolvencies is directly linked to rising inflation and interest rates, CAIRP said.

“The increase in the cost of living has an immediate impact on household budgets. At the same time, the rise in interest rates and the subsequent increase in debt repayment costs have gradual but significant effects,” said André Bolduc, Vice-President of CAIRP in a press release.

Things should get worse. During the pandemic, consumer insolvencies fell by 40% thanks to strong government supports that kept Canadians’ finances afloat, CAIRP said. But now that these financial aids have been removed, bankruptcies are starting to rebound, although they still remain below 2019 levels.

Plus, interest rates are rising at a rapid pace, shocking some people’s finances. The Bank of Canada has pledged to keep rates rising to bring inflation back to its 2% target. Inflation hit 8.1% in June from a year earlier, a level not seen in decades. This has left Canadian consumers grappling with rising debt costs due to rising interest rates, while trying to manage higher prices for essentials at the same time.

Indeed, Canadians are cutting spending where they can, and many are targeting food costs. According to a poll released yesterday by Maru Public Opinion and Yahoo Canada, 60% of Canadians have cut spending in the face of rising inflation. Of these, 68% have reduced spending at restaurants, while 61% have reduced spending at the grocery store.

But reducing can’t do much. For those who have cut spending as much as possible and are still struggling to get by, taking on more debt may be their only option. And that spells trouble, CAIRP said.

“Many may continue to accumulate more debt to make ends meet – whether by taking out loans, increasing home equity lines of credit (HELOCs) or spending on credit cards – but this only throws adding fuel to the fire,” said Bolduc.

Inflation and rising rates are also weighing on corporate balance sheets and are particularly painful for organizations that have not fully recovered from pandemic-related losses. Business insolvencies are expected to increase in the coming months, CAIRP said, with some sectors more affected than others. These include construction, transportation and warehousing.

“Looking ahead, companies in sectors most affected by cost fluctuations and supply chain pressures and shifts in business and consumer confidence are the most vulnerable,” said Jean-Daniel Breton, CAIRP President in the release.

Yet the rise in insolvencies is not necessarily a bad thing. CAIRP said insolvency can actually be a sign that a business has its eye on the ball and could help them avoid bankruptcy in the end.

“It means companies are taking proactive steps to put themselves on a more stable financial footing,” Breton said. “The sooner troubled businesses seek the help of a licensed insolvency trustee, the more restructuring options may be available to them.”

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Canola fields on a farm in Manitoba.

Canola fields on a farm in Manitoba.

FARMERS PUSH BACK A federal government plan that would force farmers to reduce the amount of nitrogen fertilizer they use to reduce greenhouse gas emissions is not being welcomed by agribusiness groups. They argue that being forced to use less fertilizer will reduce crop yields at a time when food security is a big concern. Reporting by Robert Shelton of the Financial Post. Photo by Shannon VanRaes/Reuters

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  • Deputy Prime Minister Chrystia Freeland will visit a technology innovation center, Communitech, to meet innovators and entrepreneurs. She will be joined by Waterloo MP Bardish Chagger and Kitchener South—Hespeler MP Valerie Bradford.

  • Steve Clark, Ontario Minister of Municipal Affairs and Housing, will hold a media availability after introducing legislation to provide municipalities with additional tools to build homes faster.

  • Tanya Fir, Associate Minister for Red Tape Reduction, will announce a milestone in support of the government’s goal to cut red tape by a third by 2023.

  • Cannacord Genuity’s Growth Conference takes place in Boston, MA, featuring a fireside chat with Ana Roman, Head of Investor Relations, Shopify Inc. Amos Kazzaz, Executive Vice President and CEO of Air Canada, will also make a presentation at the conference.

  • Today’s data: U.S. Consumer Price Index, U.S. Wholesale Trade

  • Earnings: Indigo Books and Music Inc., Aleafia Health Inc., Birchcliff Energy Ltd., Lucara Diamond Corp., Linamar Corp., Peyto Exploration & Development Corp., Centerra Gold Inc., Manulife Financial Corp., Pieridae Energy Ltd., High Liner Foods Inc., Stelco Holdings Inc., Metro Inc., Walt Disney Co., Honda Motor Co. Ltd., Toshiba Corp., Foxconn, Ballard Power Inc., Canadian Apartment Properties Real Estate Investment Trust

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U.S. oil production remains on track for a record high in 2023, though output is growing slower than expected amid rising costs and labor shortages in U.S. shale fields .

Production is expected to increase at an average rate of 840,000 barrels per day next year, up from an earlier forecast of 860,000, according to the Energy Information Administration. While production is still expected to hit a record high in 2023, the government has revised its forecast slightly down to 12.7 million barrels per day. The current annual record is 12.3 million set in 2019.

—Bloomberg

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Exchange-traded funds (ETFs) are a preferred way for Canadian investors to access the market. Still, with hundreds of options available, deciding which ETFs to buy can be overwhelming. Especially now, as Canadians continue to trade in a volatile market. Our content partner MoneyWise has compiled a list of the best ETFs Canadians can buy today, based on the opinions of financial experts.

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Today’s Posthaste was written by Victoria Wells (@vwells80), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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