What we’ve learned over five years of the MNP Consumer Debt Index

The MNP Consumer Debt Index celebrated its fifth anniversary in July 2023. The information we’ve collected over 25 quarterly surveys paints a detailed picture of how Canadians feel about their finances and individual debt situations.

A lot has changed since we started tracking these trends in 2017. Overall, we have seen a steady decline in consumer sentiment from year to year as households have grappled with an overwhelming amount of debt and faced challenges related to the COVID-19 pandemic, generationally high inflation, and the highest interest rates since the 2008 financial crisis.

Let’s take a closer look at some of the most prominent trends we’ve seen quarterly, annually, and over the past five years.

Five years of (almost) predictable mood swings

Like clockwork, the MNP Consumer Debt Index has tended to show increased sentiment in the spring and summer and an increasingly pessimistic outlook into the fall and winter — albeit with one exception. Two factors can likely explain this pattern. The simplest is that warmer weather and increased daylight make people feel more optimistic, and their overall disposition tends to harden through the bottom half of the year.

We also know that the holiday season plays a significant role. Sentiment historically begins to bottom out somewhere between December and March of each year. This is when the reality of holiday spending begins to hit home. Households generally feel bleaker about their outlook when they realize what it will take to bring their credit cards and lines of credit back to a manageable level.

The most recent July 2023 survey was the first time we saw a dip in sentiment heading into the summer. While we cannot draw any firm conclusions based on this limited sample, our working hypothesis is that this is due to the higher cost of living due to inflation and rising interest rates. These financial headwinds seem more robust than any summer mood boost — moreover, the added financial pressure may have prevented many households from catching up on last year’s holiday debt.

Debt sentiment was always bound to decline

While it gained 0.8 points over its first year, the average MNP Consumer Debt Index has declined in each of the past five years. There are two years where it lost one whole point (2018 to 2019, 2020 to 2021) and two years where it lost six (2019 to 2020, 2022 to 2023).

The most significant declines are also the easiest to likely explain. COVID-19 put the global economy into a tailspin, with countless business closures and layoffs occurring in early 2020. Millions of Canadians found themselves either temporarily or permanently out of jobs and needing support from federal subsidies like employment insurance (EI) and the Canada Emergency Response Benefit (CERB).

Canada’s economy faced even more trouble when inflation started its rapid ascent in the tail end of 2021 through 2023. Rising costs for necessities like groceries and fuel forced many households to lean more on credit to make ends meet. Then interest rates started climbing, which added to the financial pressure and sparked ongoing talk of a potential recession. Canadians are less confident than they have ever been about their debt and the country’s economic outlook. A large number also believe the worst is yet to come.

While the smaller declines look relatively mild in comparison, we can still learn valuable lessons from the data. It’s worth noting that Canada already had one of the highest debt-to-income ratios when we launched the MNP Consumer Debt Index. At that time, the average Canadian owed $1.70 in non-mortgage debt for every dollar they earned. In 2023, the average Canadian owes $1.85 for the same dollar of income.

The index has merely quantified something most financial experts have long known: Canadians’ debt levels appear unsustainable, and most households are not in a favourable position to weather a financial storm. Sentiment may not have dipped so drastically without the pandemic and economic crisis, but debt confidence would likely have declined either way.

Putting the index in context

The overall index score helps to contextualize how Canadians broadly feel about their debt and personal finances, but just as important are their answers to some of the questions we commonly ask.

One question that has captivated our readers most over the past five years asks Canadians how much money they have left over at the end of the month after paying all their bills and living expenses. The proportion of Canadians who answered $200 or less has never dipped below two in five. It has exceeded 50 percent on four separate occasions — a lifetime average of slightly less than 45 percent.

Why is that question so significant? It’s another way of saying that nearly half of Canadians are only $200 away from being insolvent at any given time and would likely meet the legal criteria for Bankruptcy provided they owe $1,000 or more.

Another startling figure concerns the number of Canadians who are confident they can cover all their living and family expenses over the next 12 months without taking on more debt. In 2018, fewer than two in five (38 percent) Canadians believed this. By 2023, that has dropped to only a third.

Stated another way, most households are relying on debt to make ends meet — and they’re only growing more dependent on it as the years have passed.

Because so many Canadians are living so close to the financial margins, the MNP Consumer Debt Index has also revealed that very few are saving enough for emergencies. Over the past five years, the proportion who believe they could pay for an unexpected expense such as a loss of employment, a sudden illness, or a relationship change without taking on debt has worsened by five to 10 points.

Not surprisingly, the number of Canadians who regret the amount of debt they’ve taken on in life has increased by 10 percent over the same period. The number who are worried about their current level of debt has also increased by the same proportion (9 percent).

Looking to the future

As the largest Licensed Insolvency Trustee firm in Canada, our team meets thousands of Canadians every year who are suffering under the weight of unmanageable debt. We see the emotional and economic impacts of these challenges and how they strain individuals and relationships. While we acknowledge that life happens and there’s a story behind every debt, we also believe many of the challenges households are facing are avoidable.

We created the MNP Consumer Debt Index in 2017 to bring attention to the plausible unsustainable trajectory of debt in Canada and encourage Canadians to be proactive in addressing it at an individual level. While we are proud of the conversations our research has inspired over the years, we are also concerned about how it has evolved from 2017 until today — with more people struggling than ever.

Formal solutions such as Bankruptcy and Consumer Proposals exist to help people recover from otherwise impossible situations. Our message has always been that these options are valuable and effective but, in most cases, entirely preventable. We want to see fewer Canadians requiring this last resort, which can significantly impact their lifestyle and future financial prospects. However, at the rate things are going, we are concerned that we will see considerably more in the coming years.

We encourage anyone who is struggling to manage their debt to contact their local MNP Licensed Insolvency Trustee for a free assessment of their debt situation and to discuss their options. These confidential sessions do not require participants to file a Bankruptcy or Consumer Proposal. In fact, the advice and resources we can offer may help many Canadians avoid insolvency while benefitting from ongoing professional support.