Insolvencies dropped in March

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

Bottom line

Insolvencies decline in March (-0.8% m-o-m) on a non-seasonally-adjusted basis (NSA). However, once seasonally adjusted (SA), insolvencies showed their biggest drop since the pandemic (-18% m-o-m). Insolvencies usually increase sharply in March on a NSA basis and it is highly unusual to have a decline in March on a NSA basis, happening only twice over 27 years of data. The size of the decline in both NSA and SA in March suggests that some special factors could be at play and that some reversal should be expected in April. This means that we will need to be patient to assess whether the upward trend in insolvencies has been broken.

Business insolvencies, especially bankruptcies, continued to normalize after the sharp rise seen in January. The decline in business bankruptcies in February and March proved that the surge in January was temporary and likely due to CEBA loan repayments. Nevertheless, the level of business bankruptcies remains 33.5% higher than last year, and, while it has fully corrected the jump in January, it returned to the increasing trend seen last fall.

We also note that the total levels of insolvencies in Manitoba, BC, Alberta, Saskatchewan, and Ontario remain elevated despite the decline in March; all those provinces have higher than average levels of debt-to-disposable income (see Fig 5).

As mentioned, the next few months are to be closely watched, especially whether we see a correction in April, to see whether the upward trend in insolvencies remains in place or whether we are witnessing a stabilization. On the business side, it seems that we remain of the upward trajectory seen late last year.

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. So far, the labour market’s resilience has meant that borrowers have been able to weather the shock by allowing them to readjust their lending to reduce the shock from higher interest rates on their regular payments. However, a slowing economy could be associated with a rise in unemployment, further squeezing 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 due to underperforming wages and income gains. In addition, we note that the level of insolvency is close to record highs and proposals (a renegotiation of terms) are well above their pre-pandemic level. Still, there has been some improvement since the start of the year. On the business side, we note that insolvencies, especially proposals, have increased sharply over the past year.

Insolvencies decreased 18.0% m-o-m in March on a seasonally-adjusted basis. This is the biggest monthly decline since 2009, if we exclude the pandemic. Non-seasonally adjusted, insolvencies declined by 0.8% m-o-m compared to an average increase of 12.8% m-o-m historically in March. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), eased by 0.6% compared to the same month last year. This is the first y-o-y decline since February 2022. This resulted from a 1.5% y-o-y decline in proposals, while bankruptcies increased 2.3% y-o-y). It’s important to note that proposals represent about 76% of total insolvencies.

Compared to last year, insolvencies are significantly lower in Nova Scotia (-13.6% y-o-y), Alberta (-13.1% y-o-y), and Newfoundland (-11.2% y-o-y). Insolvencies are higher than last year in Ontario (+5.1% y-o-y), Saskatchewan (+3.8% y-o-y), and BC (+3.3% y-o-y).

On a monthly basis, insolvencies dropped by 18.0% m-o-m seasonally-adjusted (sa) in March. The details show that the lower number was due to a fall in both proposals (-17.8% m-o-m) and bankruptcies (-18.3% m-o-m). At the provincial level, insolvencies declined in all provinces led by PEI (-29.7% m-o-m), New Brunswick (-22.4% m-o-m), Quebec (-21.3% m-o-m), and Nova Scotia (-20.4% m-o-m). The smallest declines were in Newfoundland (-12.1% m-o-m), BC (-13.9% m-o-m), Ontario (-14.7% m-o-m), and Saskatchewan (-14.8% m-o-m).

Relative to 2019, insolvencies in Canada are now 13.0% lower thanks to the drop on a seasonally-adjusted basis. We note that the level of insolvencies is higher compared to pre-COVID in BC (+12.4%), Manitoba (+11.6%), and Saskatchewan (+1.0% m-o-m). The level of insolvencies is well below pre-pandemic in PEI (-29.7%), New Brunswick (-22.4%), Quebec (-21.3%), and Nova Scotia (-20.4%).

We note that the level of proposals in Canada is still well above its pre-pandemic level (+11.1%), despite the drop in March. The level of proposals is also well above its pre-COVID level in Many provinces. It is the highest above 2019 levels in BC (+53.2%), Manitoba (+44.8%), Saskatchewan (+28.9%), Alberta (+17.8%), and Ontario (+16.6%). On the flip side, bankruptcies remain well below their pre-pandemic levels in all provinces (-48.6% for the country as a whole).

Business insolvencies dropped 26.6% m-o-m seasonally-adjusted in February or 15.7% m-o-m non-seasonally adjusted (+30.8% y-o-y). The decline in business insolvencies, which represent only 5% of total insolvencies, is due to a decrease in bankruptcies (-30.6% m-o-m sa. and 33.5% y-o-y) and proposals (-15.7% m-o-m sa. and +22.1% y-o-y). On a year-on-year basis, business insolvencies increased the most in Alberta (+65.0%), BC (+52.4%), Ontario (+48.2%), and Quebec (+20.5%). The sectors most affected remain accommodation and food services, retail trade and construction.

Compared to pre-pandemic levels, business insolvencies in Canada are 49.6% higher, with BC (+174%), Ontario (+89%), Alberta (58%) and Quebec (+40.4%) being the main contributors. In Ontario and  Quebec and, the rise in business insolvencies is mainly the result of higher bankruptcies, while proposals are playing a bigger role in BC and Alberta.

In Alberta, insolvencies fell by 19.2% m-o-m sa. (3.9% m-o-m NSA) and are 13.1% compared to the same month last year. This is the biggest m-o-m SA. decline since 2009. Over the past 12 months, there have been 18.3k insolvencies, slightly below the highest level on record. On a seasonally-adjusted basis, the drop in insolvencies in March came from lower bankruptcies (-14.1% m-o-m sa) and proposals (-7.4% m-o-m sa). We note that the level of proposals is currently about 18% above its pre-pandemic level, while bankruptcies are 57% below pre-COVID. On the business side, insolvencies increased 65% compared to March of last year, with proposals up by 200% and bankruptcies by 7.1% compared to last year.