Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Insolvencies declined in December on a seasonally-adjusted basis. What is surprising is that insolvencies have been on a gradual downtrend since the end of the summer despite continued strains on households’ finances due to a sharp rise in interest rates and continued deterioration in households’ purchasing power over the period.
On a seasonally-adjusted basis, insolvencies have been on a general decline since August and remain well below their pre-pandemic levels. However, proposals (a renegotiation of terms) have increased sharply over the past year. As a result, they are now above their pre-pandemic level in all Western provinces: BC, Alberta, Saskatchewan, and Manitoba. This situation suggests a rise in households struggling with their debt load.
The question is whether households are only delaying the inevitable. We note that December tends to be the weakest month for insolvency fillings, not seasonally adjusted, as households tend to defer to after the Holiday Season. Insolvencies then pick up sharply in January, February and March, not seasonally adjusted. Hence, a rebound is likely in the first quarter of 2023.
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 point to a rise in insolvencies in 2023. The question is whether the continued strength of the labour market, with the very low unemployment rate, and the vast amount of saving accumulated during the pandemic, estimated at $320bn, will continue to 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 $11bn in 2022), and the associated tailwind to the economy 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. In addition, we note that the level of proposals (a renegotiation of terms) is well above its pre-pandemic one.
Insolvencies dropped 5.6% m-o-m in December on a seasonally-adjusted basis, after after a rise in November. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 13.8% compared to the same month last year. This resulted from a 23.9% y-o-y increase in proposals, while bankruptcies were lower by 9.0% y-o-y. Compared to last year, insolvencies increased in every province, with the most significant rises in Newfoundland (+48.5% y-o-y), Nova Scotia (+39.9% y-o-y), PEI (+29.0% y-o-y), and Manitoba (+26.0% y-o-y). Quebec (+1.0% y-o-y), New Brunswick (+6.0% y-o-y), Saskatchewan (+12.7% y-o-y), and Alberta (+14.0% y-o-y) saw the smallest, yet still large in most cases, increases. We note that the data for the Atlantic provinces have been very volatile in recent months, likely affected by the aftermath of hurricane Fiona, distorting both the y-o-y and m-o-m changes.
On a monthly basis, insolvencies declined by 5.6% m-o-m seasonally-adjusted (sa) in December, bringing insolvencies to their lowest level since April 2022, on a seasonally-adjusted basis. The lower insolvencies were led by a moderation in both proposals (-4.2% m-o-m sa) and in bankruptcies (-5.7% m-o-m sa). The decrease in insolvencies on the month was led by Quebec (-12.4% m-o-m), Ontario (-6.1% m-o-m), Alberta (-5.3% m-o-m), and New Brunswick (-5.2% m-o-m). Insolvencies rose on the month in Newfoundland (+42.6% m-o-m sa), PEI (+31.2% m-o-m sa) and Manitoba (+10.6% m-o-m sa).
In Alberta, insolvencies decreased by 5.3% m-o-m sa and rose by 14.0% compared to the same month last year. Over the past 12 months, there have been 15.1k insolvencies, still well below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the decline in insolvencies in December came from a reduction in both proposals (-2.2% m-o-m sa) and bankruptcies (-11.4% m-o-m sa.). However, we note that the level of proposals is currently about 15% above its pre-pandemic level.
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