A former Bank of Canada economist says the trend of rising household insolvencies could spell trouble for the broader economy down the line.

Insolvencies dropped during the pandemic as people saved money, but Charles St-Arnaud, chief economist with Alberta Central, told BNN Bloomberg that the trend is now being “reversed completely,” with insolvencies up compared with 2019 – and the rise has been much faster than expected.

“What’s starting to be concerning is the trend,” St-Arnaud said in a television interview on Tuesday.

“Insolvencies are very much a lagging indicator of the economic cycle. Usually they tend to peak 12 months after the start of a recession. We still haven't started a recession,” he continued. “The question is, when are they going to peak and how bad is it going to be?”

In particular, St-Arnaud said the rate of proposals – where a financial institution allows a customer to renegotiate on their debts – is up across all provinces in Canada.

Bankruptcies are still comparatively low, and St-Arnaud suggested that this could be thanks to Canada’s strong labour market, because banks are more willing to renegotiate on a loan if people still have income. That dynamic could change, and he cautioned that bankruptcies could rise if more people lose their jobs and banks become more wary of their ability to pay their debts.

“That's where the negative feedback loop could be a bit more severe on the real economy,” he said.

His comments came days ahead of a scheduled Statistics Canada report on the country’s job market, which is being watched closely for signs of softening, now well over a year in to the Bank of Canada’s interest rate tightening cycle aimed at bringing down inflation.

Rising rates are squeezing consumers, and St-Arnaud said it’s a monetary policy impact that the central bank will need to watch.

“For the Bank of Canada, it's part of … some of the collateral damage of fighting inflation,” he said. “The question is how bad is it going to be, and do we start to see a negative feedback loop into the real economy?”