For a while there, it looked like government support programs had saved Canadians from widespread insolvencies and business failures in the COVID-19 recession. Maybe we declared that victory too soon.
This was a shoe that we normally would have expected to drop in the depths of the pandemic-induced recession of 2020. But the federal government poured hundreds of billions of dollars into replacing lost income for workers, and propping up businesses that were shuttered or severely restricted by public-health measures. Those actions certainly saved us from a very deep, prolonged recession two years ago.
None of this should be hugely surprising. The Bank of Canada’s rate increases, which lifted the bank’s key rate from an inviting 0.25 per cent to an imposing 2.5 per cent in just four months, were bound to weigh on consumer and corporate borrowers. That’s the whole point of raising rates: It’s supposed to make debt more expensive, to impose new costs on spenders and, thus, slow their consumption.Statscan reported that the economy shed 31,000 jobs in July, adding to June’s 43,000-job decline.
And if hiring is heading into a slowdown, the rising consumer insolvency count could be the tip of the iceberg. The booming labour market has been critical to sustaining high household debt levels. But rising interest rates and slowing employment will put a lot more consumer debt at risk.