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

Bottom line

Insolvencies rebounded in January on a seasonally-adjusted basis. This follows a surprising declining trend in insolvencies 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.

Despite the increase in January, insolvencies remain below the level reached in August. 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, Manitoba, in addition of Ontario. This situation suggests a rise in households struggling with their debt load.

The question is whether households were delaying the inevitable last fall. Insolvencies tend to increase sharply in January, February and March, not seasonally adjusted. Hence, the rebound is likely to continue for most of 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 jumped 11.3% m-o-m in January on a seasonally-adjusted basis, after declining in December. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 33.7% compared to the same month last year. This resulted from a 43.7% y-o-y rise in proposals and a 6.6% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province, with the most significant rises in Manitoba (+64.3% y-o-y), Nova Scotia (+57.2% y-o-y), Alberta (+42.3% y-o-y) and Ontario (+40.9% y-o-y). New Brunswick (+7.5% y-o-y), PEI (+12.1% y-o-y), Newfoundland (+15.8% y-o-y), and Québec (+19.7% 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 jumped by 11.3% m-o-m seasonally-adjusted (sa) in January, bringing insolvencies to their highest level since August 2022, on a seasonally-adjusted basis. The rise in insolvencies was led by both higher proposals (+6.6% m-o-m sa) and in bankruptcies (+12.0% m-o-m sa). The increase in insolvencies on the month was led by Quebec (+15.8% m-o-m), Nova Scotia (+12.5% m-o-m), Ontario (+10.3% m-o-m), and Alberta (+7.8% m-o-m).

We note that the level of proposals in Canada is now slightly above its pre-pandemic level (+0.7%). The level of proposals is above its pre-COVID level in Saskatchewan (+34%), BC (+29%), Alberta (+27%), Manitoba (+17%), and Ontario (+3.5%). This suggests that an increasing share of consumers are facing financial stress.

In Alberta, insolvencies increased by 7.8% m-o-m sa and surged by 42.3% compared to the same month last year. Over the past 12 months, there have been 15.5k insolvencies, still well below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the rise in insolvencies in January came from an increase in both proposals (+7.9% m-o-m sa) and bankruptcies (+15.1% m-o-m sa.). We note that the level of proposals is currently about 27% above its pre-pandemic level, while bankruptcies are 64% below pre-COVID.

Independent Opinion

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