Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Insolvencies eased in May on a seasonally-adjusted basis (NSA). Nevertheless, the level remained above 12k, a level they have been above since the beginning of the year, except for a temporary decline below this mark in March.
Business insolvencies increased in May, mainly due to higher proposals, but remained lower than in January. Both insolvencies and bankruptcy levels are consistent with the rising trend experienced since mid-2023. As such, business bankruptcies are almost 50% higher than last year and almost double the levels seen in 2019.
We also note that the total levels of insolvencies in BC, Ontario, Manitoba, Saskatchewan, and Alberta are well above the levels seen in 2019; all those provinces have higher than average levels of debt-to-disposable income (see Fig 5).
The May data shows that insolvencies remain elevated and on an upward trend, suggesting that an increasing share of households are struggling with their debt. Similarly, insolvencies are also increasing on the business side, signaling continued pressures.
Record levels of household debt, declining purchasing power due to the recent inflationary episode, and higher 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 rise in unemployment would be a major risk, further squeezing consumers. Moreover, despite the recent rate cut, interest rates remain well above the level seen in recent years, meaning that many homeowners have 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 insolvency level is at record highs and proposals (a renegotiation of terms) are well above their pre-pandemic level. Still, there has been some improvement since the start of the year. On the business side, we note that insolvencies, especially proposals, have increased sharply over the past year.
Insolvencies eased 0.7% m-o-m in May on a seasonally-adjusted basis, following a normalization in April (+22.0% m-o-m). The volatility in the monthly seasonally-adjusted changes could be due to the timing of the Easter holiday. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 12.3% compared to the same month last year. This resulted from an 11.3% y-o-y rise in proposals and a 15.1% y-o-y increase in bankruptcies. It’s important to note that proposals represent about 76% of total insolvencies.
Compared to last year, insolvencies have increased the most in Saskatchewan (+18.9% y-o-y), Quebec (18.1% y-o-y), Ontario (+16.5% y-o-y), and BC (+9.0% y-o-y). Insolvencies are lower than last year in New Brunswick (-16.5% y-o-y), PEI (-8.3% y-o-y), Nova Scotia (-4.8% y-o-y), and Newfoundland (-4.1% y-o-y).
On a monthly basis, insolvencies eased by 0.7% m-o-m seasonally-adjusted (sa) in May. The details show that an increase in bankruptcies (+2.3% m-o-m) was more than fully offset by a decline in proposals (-1.5% m-o-m). At the provincial level, insolvencies rose the most in Newfoundland (+12.9% m-o-m), Manitoba (+7.5% m-o-m), Nova Scotia (+5.7% m-o-m), and Saskatchewan (+3.3% m-o-m). They declined in PEI (-12.0% m-o-m), New Brunswick (-5.5% m-o-m), Ontario (-4.4% m-o-m), and BC (-0.2% m-o-m).
Relative to 2019, insolvencies in Canada are currently 6.0% higher, mainly due to insolvencies being 33.7% above their 2019 levels, while bankruptcies are 36% below. We note that the level of insolvencies is higher compared to pre-COVID in Manitoba (+28%), BC (+26%), Ontario (+18%), Saskatchewan (+18%), and Alberta (+15%). The level of insolvencies is well below pre-pandemic in PEI (-35%), New Brunswick (-35%), Newfoundland (-29%), Nova Scotia (-27%), and Quebec (-9%).
We note that the level of proposals in Canada is well above its pre-pandemic level (+33.7%). The level of proposals is also well above its pre-COVID level in all provinces, except in New Brunswick (-3.0%) and PEI (-2.5%). It is the highest above 2019 levels in BC (+66%), Manitoba (+63%), Saskatchewan (+58%), Alberta (+50%), and Ontario (+39%).
The consumer insolvency rate (number of insolvencies per 1000 person aged 15 and over) was 0.352 in May, slightly lower than in April and about 0.02 below its level of 2019. The insolvency rate is the highest in Newfoundland (0.418), Quebec (0.416), Nova Scotia (0.412), and Alberta (0.405). It is the lowest in BC (0.251), PEI (0.261), Manitoba (0.297), and Ontario (0.330). Compared to 2019, the insolvency rate has eased by 0.02 in Canada. It has declined the most in New Brunswick (-0.251), PEI (-0.219), Nova Scotia (-0.212), and Newfoundland (-0.185). It increased the most in Manitoba (+0.044), Saskatchewan (+0.038), Bc (+0.031), and Ontario (+0.020).
Business insolvencies rose 1.2% m-o-m seasonally-adjusted in May (+41.7% y-o-y). The increase in business insolvencies over the past year, which represent less than 5% of total insolvencies, is due to a rise in bankruptcies (+47.0% y-o-y) and proposals (+25.3% y-o-y). On a year-on-year basis, the increase in business insolvencies at the national level was mainly the result of higher insolvencies in Alberta (+83.3% y-o-y), Quebec (+43.8% y-o-y), BC (+40.0% y-o-y), and Ontario (+35.1% 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 89% higher, with BC (+115%), Ontario (+109%), Quebec (+93%), and Alberta (+86%) being the main contributors. In Ontario, Quebec and BC, the rise in business insolvencies is mainly the result of higher bankruptcies, while proposals are playing a bigger role in Alberta.
In Alberta, insolvencies increased by 1.9% m-o-m sa. and by 8.2% compared to the same month last year. Over the past 12 months, there have been 18.7k insolvencies, its highest level on record. On a seasonally-adjusted basis, the rise in insolvencies in May came from higher proposals (+3.9% m-o-m sa), while bankruptcies declined (-8.2% m-o-m sa). We note that the level of proposals is currently about 50% above its pre-pandemic level, while bankruptcies are 52% below pre-COVID. On the consumer side, the insolvency rate was 0.405, barely changed compared to pre-pandemic. On the business side, insolvencies increased 83% compared to May of last year, with proposals up by 303%, while bankruptcies 8% lower compared to last year.
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Independent Opinion
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