Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Insolvencies were almost unchanged in February on a seasonally-adjusted basis, after a surge in January, and appear to have resumed their upward trend. Nevertheless, proposals (a renegotiation of terms) are almost 36% above their pre-pandemic levels at the national level and significantly higher in many provinces. The decline in business bankruptcies in February suggests that the surge in January may have been due to CEBA loan repayments and some catch-up after months of weakness.
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). We also note that business insolvencies, especially bankruptcies, have surged over the past year, more than doubling, and are at levels not since 2008 (Fig 6).
The next few months are to be closely watched. We usually see a sharp rise in insolvencies in the first three months of the calendar year, generally peaking in March. We will be watching to see whether insolvencies deteriorate more than seasonal patterns suggest over that period. Moreover, we will be looking to see whether the CEBA repayments may lead to more business bankruptcies, which the January data could hint at, or whether we will continue to see a decline towards more subdued levels.
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. So far, the labour market’s resilience has meant that borrowers have been able to weather the shock by allowing them to readjust their lending to reduce the shock from higher interest rates on their regular payments. However, a slowing economy could be associated with a rise in unemployment, further squeezing 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 due to underperforming wages and income gains. In addition, we note that the level of insolvency is at record highs and proposals (a renegotiation of terms) are well above their pre-pandemic level.
Insolvencies increase 0.2% m-o-m in February on a seasonally-adjusted basis. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 28.2% compared to the same month last year. This resulted from a 28.6% y-o-y rise in proposals and a 26.9% y-o-y increase in bankruptcies. It’s important to note that proposals represent about 76% of total insolvencies. Compared to last year, insolvencies increased in every province. Insolvencies had the most significant rises in PEI (+50.0% y-o-y), Quebec (+34.4% y-o-y), Manitoba (+33.6% y-o-y), and Ontario (+31.7% y-o-y). The smallest increases, albeit still large, were in Newfoundland (+14.9% y-o-y), Alberta (+15.8% y-o-y), Nova Scotia (+17.9% y-o-y), and New Brunswick (+18.4% y-o-y).
On a monthly basis, insolvencies rose by 0.2% m-o-m seasonally-adjusted (sa) in February. The details show that the higher number was due to a jump in proposals (+2.3% m-o-m), while bankruptcies eased 3.6% m-o-m. At the provincial level, insolvencies increased in most provinces led by PEI (+32.8% m-o-m), Manitoba (+20.4% m-o-m), New Brunswick (+12.8% m-o-m), and Quebec (+4.5% m-o-m). Insolvencies declined in BC (-4.4% m-o-m), Ontario +3.4% m-o-m), Nova Scotia (-1.7% m-o-m), and Newfoundland (-0.3% m-o-m)
Relative to 2019, insolvencies in Canada are 6.8% higher and continue to trend upward. We note that the level of insolvencies is significantly higher compared to pre-COVID in Manitoba (+33.3%), BC (+31.5%), Saskatchewan (+20.1%), Ontario (+17.5%), and Alberta (+15.2%). The level of insolvencies is still well below pre-pandemic in Newfoundland (-24.5%), Nova Scotia (-21.3%), New Brunswick (-16.6%), Quebec (-7.7%), and PEI (-6.9%).
We note that the level of proposals in Canada is well above its pre-pandemic level (+35.8%). The level of proposals is also above its pre-COVID level in all provinces. It is the highest above 2019 levels in Manitoba (+83.1%), BC (+76.6%), Saskatchewan (+59.8%), Alberta (+48.9%), and Ontario (+39.4%). However, despite the recent increase, bankruptcies remain well below their pre-pandemic levels in all provinces.
Business insolvencies dropped 22.0% m-o-m seasonally-adjusted in February (122.0% y-o-y) and are close to their highest level since 2008. The decline in business insolvencies, which represent only 5% of total insolvencies, is due to a decrease in bankrupcies (-18.4%% m-o-m sa. and 127.4% y-o-y) and proposals (-11.6% m-o-m sa. and +104.3% y-o-y). Rising business insolvencies in recent months, especially bankruptcies, are mainly concentrated in Ontario (+160.3% y-o-y) and Quebec (+127.8% y-o-y). The sectors most affected remain accommodation and food services, retail trade and construction.
Compared to pre-pandemic levels, business insolvencies in Canada are 106.3% higher, with BC (+160%), Ontario (+142%), Quebec (+123%), and New Brunswick (+107%). In Ontario, Quebec and New Brunswick, the rise in business insolvencies is mainly the result of higher bankruptcies, while proposals are playing a bigger role in BC.
In Alberta, insolvencies increased by 2.4% m-o-m sa. and are 15.8% higher compared to the same month last year. Over the past 12 months, there have been 18.5k insolvencies, the highest levels on record. On a seasonally-adjusted basis, the increase in insolvencies in February came from higher bankruptcies (+2.8% m-o-m sa) and proposals (+1.3% m-o-m sa). We note that the level of proposals is currently about 49% above its pre-pandemic level, while bankruptcies are 53% below pre-COVID. On the business side, insolvencies dropped 47.4% compared to February of last year, with proposals up by 133% and bankruptcies by 31% compared to last year.
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Independent Opinion
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