Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Insolvencies eased again in June by 7.2% n-o-n on a seasonally-adjusted basis (SA) and have been quite volatile since the beginning of the year, even on a seasonally-adjusted basis. Nevertheless, looking through the volatility, insolvencies remain on an upward trend.
The consumer insolvency rate (insolvencies per 1000 population) eased slightly in June. While it has increased over the past year, it remains below its average pre-pandemic level (see Fig 5 and 6) nationally and in many provinces. This suggests that the share of households struggling financially is not increasing.
We note that the total levels of insolvencies in BC, Ontario, Manitoba, Saskatchewan, and Alberta are well above the levels seen in 2019; all those provinces have higher than average levels of debt-to-disposable income (see Fig 7). Similarly, these provinces have seen the smallest decline in insolvency rate compared to pre-Covid.
The June data shows that insolvencies, while still on an upward trend, remain contained. A similar situation is also visible on the business side, where there seems to be a stabilization in recent months.
Record levels of household debt, declining purchasing power due to the recent inflationary episode, and higher 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, job losses would be a major risk, further squeezing consumers. Moreover, despite the recent rate cuts, interest rates remain well above the level seen in recent years, meaning that many homeowners have 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 It’s a “Me-cession”, not a recession and 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 insolvency level is at 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 seem to have stabilized in recent months.
Insolvencies eased 7.2% m-o-m in June on a seasonally-adjusted basis, the second monthly decline. Insolvencies have been quite volatile so far this year, even on a seasonally-adjusted basis. Nevertheless, they continue to trend higher. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 4.9% compared to the same month last year. This resulted from a 5.1% y-o-y rise in proposals and a 4.1% y-o-y increase in bankruptcies. It’s important to note that proposals represent about 77% of total insolvencies.
Compared to last year, insolvencies have increased the most in Nova Scotia (+12.0% y-o-y), Quebec (+11.8% y-o-y), Ontario (+8.5% y-o-y), and Alberta (+1.9% y-o-y). Insolvencies are lower than last year in New Brunswick (-18.0% y-o-y), Newfoundland (-16.6% y-o-y), Saskatchewan (-15.4% y-o-y), and Manitoba (-3.4% y-o-y).
On a monthly basis, insolvencies eased by 7.2% m-o-m seasonally-adjusted (sa) in June. The details show a decline in both bankruptcies (-11.1% m-o-m) and proposals (-5.8% m-o-m). At the provincial level, insolvencies were lower in every province, except in PEI (+9.9% m-o-m) and Nova Scotia (+1.7% m-o-m). They decreased the most in Newfoundland (17.2% m-o-m), Manitoba (-13.7% m-o-m), Quebec (-9.6% m-o-m), and Saskatchewan (-8.9% m-o-m).
Relative to 2019, insolvencies in Canada are currently 3.5% lower, with insolvencies being 25% above their 2019 levels, while bankruptcies are 45% below. We note that the level of insolvencies is higher compared to pre-COVID in BC (+20%), Alberta (+11%), Ontario (+9%), Manitoba (+9%), and Saskatchewan (+6%). The level of insolvencies is well below pre-pandemic in Newfoundland (-41%), New Brunswick (-36%), PEI (-29%), Nova Scotia (-24%), and Quebec (-19%)
We note that the level of proposals in Canada is well above its pre-pandemic level (+24.7%). The level of proposals is also well above its pre-COVID level in all provinces, except in Newfoundland (-16.8%) and New Brunswick (-8.6%). It is the highest above 2019 levels in BC (+60%), Alberta (+45%), Saskatchewan (+39%), Manitoba (+37%), and Ontario (+30%).
The consumer insolvency rate (number of insolvencies per 1000 people aged 15 and over) was 0.324 in June, slightly lower than in May and about 0.05 below its level of 2019. The insolvency rate is the highest in Nova Scotia (0.427), Alberta (0.392), Quebec (0.375), and New Brunswick (0.367). It is the lowest in BC (0.241), Manitoba (0.248), PEI (0.291), and Ontario (0.302).
Compared to 2019, the insolvency rate has eased by 0.05 in Canada. It has declined the most in New Brunswick (-0.264), Newfoundland (-0.260), Nova Scotia (-0.198), and PEI (0.189). It increased in BC (+0.020), and Manitoba (+0.002).
Business insolvencies dropped 19.5% m-o-m seasonally-adjusted in June (+23.7% y-o-y). The increase in business insolvencies over the past year, which represent less than 5% of total insolvencies, is due to a rise in bankruptcies (+22.3% y-o-y) and proposals (+28.2% y-o-y). On a year-on-year basis, the increase in business insolvencies at the national level was mainly the result of higher insolvencies in Quebec (+22.5% y-o-y), and Ontario (+57.3% y-o-y), and to a lesser extent, Manitoba (+450%) but the numbers are small in this province. The most affected sectors remain accommodation and food services, construction, transport, and warehousing.
Compared to pre-pandemic levels, business insolvencies in Canada are 50% higher, with Manitoba (+206%), Ontario (+103%), and Quebec (+47%) being the main contributors.
In Alberta, insolvencies decreased by 3.3% m-o-m sa. and were 1.9% compared to the same month last year. Over the past 12 months, there have been 18.8k insolvencies, its highest level on record. On a seasonally-adjusted basis, the decline in insolvencies in June came from lower proposals (-3.6 % m-o-m sa) and bankruptcies (-6.7% m-o-m sa). We note that the level of proposals is currently about 45% above its pre-pandemic level, while bankruptcies are 57% below pre-COVID. On the consumer side, the insolvency rate was 0.392, marginally below its pre-pandemic level. On the business side, insolvencies are flat compared to May of last year, with proposals up by 10%, while bankruptcies 9% lower compared to last year.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.