Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Insolvencies upward trend resumed in August, after a slight decline in July. While the level remains lower than before the pandemic and the pause in July, there are clear signs that insolvencies are rising fast. Moreover, despite the overall level of insolvencies remaining low, proposals (a renegotiation of terms) have increased sharply in recent months. They are now above their pre-pandemic nationally and in Saskatchewan, Alberta, Manitoba, BC, and Ontario. This situation suggests a rise in households struggling with debt load as the Bank of Canada hiked continues raising interest rates.
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 (see The Great Consumer Squeeze for details). Moreover, a slowing economy is likely to be associated with a rise in unemployment. All those factors are pointing to a continued increase in insolvencies in the coming months. The question is whether the strength of the labour market, with the lowest unemployment rate on record and the vast amount of saving accumulated during the pandemic, estimated at $320bn, will provide some relief.
In Alberta, a strong recovery in the oil sector, with the value of oil production reaching an all-time high since mid-2021 (production value has averaged $12bn since the start of 2022), and the associated tailwind on income and confidence, and a robust labour market could help to hold back insolvencies. However, Albertan households have some of the highest debt-to-income ratios, making them vulnerable to rising interest rates. We already note that the level of proposals (a renegotiation of terms) is well above its pre-pandemic one.
Insolvencies jumped in August to their highest level since March 2020 in June, on a seasonally-adjusted basis. Nevertheless, their number remained below their pre-COVID levels. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 27.6% compared to the same month last year. This resulted from a 38.5% y-o-y increase in proposals, while bankruptcies were up by a more modest 4.1% y-o-y. Compared to last year, insolvencies increased in every province. The increase was the most significant in Manitoba (+65.2% y-o-y), Newfoundland (+55.4% m-o-m), and BC (+35.6% y-o-y). New Brunswick (+14.8% y-o-y), Quebec (+19.7% y-o-y), and PEI (+25.0% y-o-y) saw the smallest, yet still large, increases.
On a monthly basis, insolvencies rose by 9.8% m-o-m seasonally-adjusted (sa) in August. The higher insolvencies were led by an increase in both proposals (+12.0% m-o-m sa) and in bankruptcies (+3.8% m-o-m sa). The rise in insolvencies on the month was led by Newfoundland (+26.4% m-o-m), BC (+17.5% m-o-m sa), Manitoba (+14.9% m-o-m sa), and Ontario (+14.2% m-o-m sa). Insolvencies declined on the month in PEI (-7.4% m-o-m sa), New Brunswick (-3.1% m-o-m sa), Saskatchewan (-1.5% m-o-m sa), and Nova Scotia (-0.7% m-o-m).
In Alberta, insolvencies rose by 8.0% m-o-m sa and increased by 35.6% compared to the same month last year. Over the past 12 months, there have been 14.6k insolvencies, still well below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the increase in insolvencies in August came from a rise in both proposals (+6.2% m-o-m sa) and bankruptcies (+7.3% m-o-m sa.). However, we note that the level of proposals is now well above its pre-pandemic level and rising.
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