Insolvencies resume their march higher

Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.

Bottom line

Insolvencies increased in October on a seasonally-adjusted basis, continuing their gradual rising trend, and remained close to their highest level since the start of the pandemic. As such, proposals (a renegotiation of terms) are more than 25% above their pre-pandemic levels at the national level and significantly higher in almost every province. We also note that the total level of insolvencies in Saskatchewan, BC, Alberta,  Manitoba, and Ontario is above its pre-pandemic level; all those provinces have higher than average levels of debt-to-disposable income (see Fig 5).

Record levels of household debt, declining purchasing power due to rising inflation, and the sharp rise in interest rates are putting pressure on households’ finances. A slowing economy is likely to be associated with an increase in unemployment, which would further squeeze consumers. Moreover, previous rate hikes have not yet fully filtered through to household borrowing, with many homeowners having to renew their mortgages at higher rates over the next few years. All those factors point to further rises in insolvencies. The question is whether the labour market will continue to provide some relief with its low albeit increasing unemployment rate and the vast amount of savings accumulated during the pandemic. A deterioration in labour market conditions, especially job losses, and the associated decline in income would likely lead to a jump higher in insolvencies (see Will it be a hard landing or a soft landing? The labour market will decide).

In Alberta, the strength of the oil sector, with high revenue levels and the associated tailwind to the economy, and a robust labour market are also holding back insolvencies. However, Albertan households have some of the highest debt-to-income ratios, making them vulnerable to rising interest rates and income losses. They have also seen a bigger decline in their purchasing power than other provinces. In addition, we note that the level of insolvency continues to reach new record highs and proposals (a renegotiation of terms) are well above their pre-pandemic level.

Insolvencies rose 4.8% m-o-m in October on a seasonally-adjusted basis, after a decrease in September. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 27.1% compared to the same month last year. This resulted from a 30.1% y-o-y rise in proposals and a 17.7% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province except in Newfoundland, where they are 6.5% lower and flat in PEI (+0.0% y-o-y). Insolvencies had the most significant rises in BC (+31.7% y-o-y), Manitoba (+31.3% y-o-y), Ontario (+30.1% y-o-y), and Alberta (+29.9% y-o-y). The smallest increases, yet still big in many cases, were in New Brunswick (+6.9% y-o-y), Saskatchewan (+18.6% y-o-y), Nova Scotia (+25.2% y-o-y), and Quebec (+26.3% y-o-y).

On a monthly basis, insolvencies increased 4.8% m-o-m seasonally-adjusted (sa) in October. The details show that the higher number was due to lower proposals (+4.7% m-o-m) and bankruptcies (+5.0% m-o-m). At the provincial level, insolvencies rose in every province except in PEI (-21.1% m-o-m) and Saskatchewan (+-5.9% m-o-m). The biggest gains were in New Brunswick (+6.7% m-o-m), Alberta (+6.7% m-o-m), Quebec (+6.3%), Ontario (+4.0% m-o-m), and BC (+4.0% m-o-m).

Relative to 2019, insolvencies in Canada are 4.9% lower and remain on a rising trend. However, we note that the level of insolvencies is higher compared to pre-COVID in BC (+27.4%), Manitoba (+18.3%), Alberta (+16.9%), Saskatchewan (+7.8%), and Ontario (+3.0%). The level of insolvencies is still well below pre-pandemic in Newfoundland (-39.6%), PEI (-38.6%), Nova Scotia (-28.9%), New Brunswick (-24.7%), and Quebec (-21.2%).

We note that the level of proposals in Canada is well above its pre-pandemic level (+24.4%). The level of proposals is also above its pre-COVID level in most provinces, except in Newfoundland (-16.4%) and PEI (-2.4%). It is the most above 2019 levels in BC (+70%), Manitoba (+66%), Alberta (+54%), Saskatchewan (+46%), and Ontario (+21%). This suggests that an increasing share of households are facing financial stress.

In Alberta, insolvencies rose by 6.7% m-o-m sa. and are 29.9% higher compared to the same month last year. Over the past 12 months, there have been 17.6k insolvencies, the highest levels on record. On a seasonally-adjusted basis, the decrease in insolvencies in October came from higher proposals (+10.6% m-o-m sa), while bankruptcies were lower (-9.9% m-o-m sa). We note that the level of proposals is currently about 54% above its pre-pandemic level, while bankruptcies are 53% below pre-COVID.