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

Bottom line

Insolvencies rose in August on a seasonally-adjusted basis. Insolvencies are continuing their gradual rising trend and close to their highest level since the start of the pandemic. As such, proposals (a renegotiation of terms) are above their pre-pandemic levels at the national level and in almost every province. We also note that the total level of insolvencies in Saskatchewan, BC, Alberta, Manitoba, and Ontario, is above its pre-pandemic one; all of those provinces have higher than average levels of debt-to-disposable income (see Fig 6).

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). Interestingly, there seems to be little correlation between the change in purchasing power since 2019 and insolvencies by provinces (see The Alberta Advantage is melting away). A slowing economy is likely to be associated with a rise in unemployment, which could further squeeze on consumers. Moreover, previous rate hikes have not yet fully filtered through to household borrowing. All those factors point to further rises 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 will continue to provide some relief.

In Alberta, the recovery in the oil sector, with strong revenue levels 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, and have seen a bigger decline in their purchasing power than other provinces. In addition, we note that the level of insolvency and proposals (a renegotiation of terms) are above their pre-pandemic one.

Insolvencies rose 2.3% m-o-m in August on a seasonally-adjusted basis, after a decline in July. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 18.3% compared to the same month last year. This resulted from a 22.0% y-o-y rise in proposals and a 7.7% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province. Insolvencies had the most significant rises in Ontario (+23.1% y-o-y), Quebec (+17.9% y-o-y), Alberta (17.1% y-o-y), and BC (+16.9% y-o-y). Manitoba (+2.0% y-o-y), Newfoundland (+4.8% y-o-y), PEI (+8.6% y-o-y), and New Brunswick (+12.9% y-o-y) saw the smallest, yet still large in most cases, increases.

On a monthly basis, insolvencies rose 2.4% m-o-m seasonally-adjusted (sa) in August. The details show the increase was mainly due to higher proposals (+2.0% y-o-y) and bankruptcies (+3.6% m-o-m). At the provincial level, insolvencies increased the most in Alberta (+8.0% m-o-m), Saskatchewan (+6.8% m-o-m), BC (+5.4% m-o-m), and PEI (+3.5% m-o-m). This was partly offset by declines in New Brunswick (-7.9% m-o-m), Manitoba (-6.0% m-o-m), Newfoundland (-3.6% m-o-m), and Nova Scotia (-2.1% m-o-m).

Relative to 2019, insolvencies in Canada are 4.0% lower, but remain on a rising trend. However, we note that the level of insolvencies is higher compared to pre-COVID in Manitoba (+23.5%), BC (+20.8%), Alberta (+14.7%), Saskatchewan (+10.2 %), and Ontario (+5.3%). The level of insolvencies is still well below pre-pandemic in PEI (-32.2%), Nova Scotia (-28.2%), Newfoundland (-23.7%), New Brunswick (-22.1%), and Quebec (-21.9%).

We note that the level of proposals in Canada is well above its pre-pandemic level (+24.7%). The level of proposals is also above its pre-COVID level in all provinces, except in Newfoundland (-8.8%) and PEI (-2.5%). It is the most above 2019 levels in Manitoba (+61%), BC (+60%), Saskatchewan (+50%), Alberta (+47%), and Ontario (+27%). This suggests that an increasing share of households are facing financial stress.

In Alberta, insolvencies rose by 8.0% m-o-m sa. and are 17.1% higher compared to the same month last year. Over the past 12 months, there have been 17.0k insolvencies, the highest since March 2020, and only just below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the increase in insolvencies in August came from an increase in both proposals (+4.8% m-o-m sa) and bankruptcies (27.5% m-o-m sa). We note that the level of proposals is currently about 47% above its pre-pandemic level, while bankruptcies are 47% below pre-COVID.

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.