Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Insolvencies increased in November on a seasonally-adjusted basis, continuing their gradual rise, and are at their highest level since the start of the pandemic. However, the pace of increase has slowed in recent months. Nevertheless, proposals (a renegotiation of terms) are about 25% above their pre-pandemic levels at the national level and significantly higher in almost every province. We also note that the total level of insolvencies in Manitoba, BC, Alberta, Saskatchewan, and Ontario is above its pre-pandemic level; all those provinces have higher than average levels of debt-to-disposable income (see Fig 5).
The next few months are likely to be interesting for insolvencies and whether the slower pace of increase will remain. December is seasonally a low point for insolvencies, while the first three months of the calendar year is when we see a sharp rise, usually peaking in March. We will be watching to see whether insolvencies deteriorate more than seasonal patterns suggest over that period.
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. A slowing economy is likely to be associated with an increase in unemployment, which would further squeeze 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. In addition, we note that the level of insolvency continues to reach new record highs and proposals (a renegotiation of terms) are well above their pre-pandemic level.
Insolvencies rose 0.3% m-o-m in November on a seasonally-adjusted basis. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 24.4% compared to the same month last year. This resulted from a 26.2% y-o-y rise in proposals and an 18.9% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province. Insolvencies had the most significant rises in Newfoundland (43.7% y-o-y), Manitoba (42.5% y-o-y), PEI (36.4% y-o-y), and BC (25.7% y-o-y). The smallest increases, yet still big in many cases, were in New Brunswick (+7.3% y-o-y), Nova Scotia (+17.6% y-o-y), Saskatchewan (+23.5% y-o-y), and Alberta (+23.5% y-o-y).
On a monthly basis, insolvencies increased by 0.3% m-o-m seasonally-adjusted (sa) in November. The details show that the higher number was due to higher bankruptcies (+1.4% m-o-m), while proposals were slightly lower (-0.1% m-o-m). At the provincial level, insolvencies rose in most provinces except in New Brunswick (-5.0 m-o-m), BC (-1.6% y-o-y), and Nova Scotia (-0.4% m-o-m). The biggest gains were in Newfoundland (+8.7% m-o-m), Manitoba (+4.8% m-o-m), PEI (+3.8% m-o-m), and Saskatchewan (+3.1% m-o-m).
Relative to 2019, insolvencies in Canada are 3.9% lower and remain on a rising trend. However, we note that the level of insolvencies is higher compared to pre-COVID in BC (+25.5%), Manitoba (+24.6%), Alberta (+18.9%), Saskatchewan (+10.8%), and Ontario (+4.3%). The level of insolvencies is still well below pre-pandemic in PEI (-37.1%), Newfoundland (-33.1%), New Brunswick (-29.0%), Nova Scotia (-28.8%), and Quebec (-20.6%).
We note that the level of proposals in Canada is well above its pre-pandemic level (+24.8%). The level of proposals is also above its pre-COVID level in all provinces, except in Newfoundland (-9.1%). It is the most above 2019 levels in Manitoba (+74%), BC (+66%), Saskatchewan (+53%), Alberta (+52%), and Ontario (+25%). This suggests that an increasing share of households are facing financial stress.
In Alberta, insolvencies rose by 1.2% m-o-m sa. and are 23.5% higher compared to the same month last year. Over the past 12 months, there have been 18.0k insolvencies, the highest levels on record. On a seasonally-adjusted basis, the increase in insolvencies in November came from higher bankruptcies (+2.2% m-o-m sa), while proposals were lower (-1.6% m-o-m sa). We note that the level of proposals is currently about 52% above its pre-pandemic level, while bankruptcies are also 52% below pre-COVID.
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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.