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

Bottom line

Insolvencies surged in January on a seasonally-adjusted basis and appear to have resumed their upward trend. However, it is important to note that the rise in January follows a decline in December. Nevertheless, proposals (a renegotiation of terms) are almost 30% above their pre-pandemic levels at the national level and significantly higher in many provinces. In addition, the strong contribution from bankruptcies in January could suggest they are bottoming out and starting to normalize back to their pre-pandemic levels.

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 reaching their highest level since comparable data started in 2007 (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.

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 is likely to be associated with a rise 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 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 jumped 12.5 % m-o-m in January on a seasonally-adjusted basis, with bankruptcies surging 22.7% m-o-m. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 27.4% compared to the same month last year. This resulted from a 25.7% y-o-y rise in proposals and a 32.8% y-o-y increase in bankruptcies. It’s important to note that proposals represent about 74% of total insolvencies. Compared to last year, insolvencies increased in every province. Insolvencies had the most significant rises in Ontario (+34.9% y-o-y), Quebec (+32.9% y-o-y), BC (+32.7% y-o-y), and Newfoundland (+22.3% y-o-y). The smallest increases, albeit still large, were in Manitoba (+5.8% y-o-y), Alberta (+9.9% y-o-y), New Brunswick (+13.2% y-o-y), and Saskatchewan (+13.4% y-o-y).

On a monthly basis, insolvencies rose by 12.5% m-o-m seasonally-adjusted (sa) in January. The details show that the higher number was due to a jump in bankruptcies (+22.7% m-o-m), the biggest monthly increase since 2013, while proposals rose 8.9% m-o-m. At the provincial level, insolvencies declined in all provinces, led by PEI (+34.7% m-o-m), Ontario (+21.7% m-o-m), BC (+21.3% m-o-m), and Nova Scotia (+15.6% m-o-m). We note that the sharp rise in bankruptcies is mainly driven by Ontario (+36.2% m-o-m), Quebec (+22.9% m-o-m), and Saskatchewan (+21.2% m-o-m).

Relative to 2019, insolvencies in Canada are 5.3% higher and appear to have resumed their upward trend. We note that the level of insolvencies is significantly higher compared to pre-COVID in BC (+37.9%), Ontario (+22.8%), Saskatchewan (+13.7%), Alberta (+11.8%), and Manitoba (+6.6%). The level of insolvencies is still well below pre-pandemic in PEI (-31.0%), New Brunswick (-27.2%), Newfoundland (-24.8%), Nova Scotia (-20.1%), and Quebec (-12.6% m-o-m).

We note that the level of proposals in Canada is well above its pre-pandemic level (+30.7%). The level of proposals is also above its pre-COVID level in most provinces, except in Newfoundland (-4.4%). It is the highest above 2019 levels in BC (+84.5%), Alberta (+46.9%), Saskatchewan (+46.9%), Manitoba (+47.0%), and Ontario (+38.2%). However, despite the recent surge, bankruptcies remain well below their pre-pandemic levels in all provinces.

Business insolvencies jumped 65.3% m-o-m seasonally-adjusted in January (57.2% y-o-y) and are reaching their highest level since records started in 2007. The rise in business insolvencies, which represent only 7% of total insolvencies, is due to a surge in bankrupcies (+57.7% m-o-m sa. and 137.6% y-o-y) and proposals (+78.6% m-o-m sa. and +97.1% y-o-y). Rising business insolvencies, especially bankruptcies, in Ontario (+172.3% y-o-y), BC (+141.7% y-o-y), Quebec (+110.6% y-o-y), and Alberta (94.1% y-o-y) are the primary drivers of this trend. The sectors most affected are accommodation and food services, retail trade and construction.

Compared to pre-pandemic levels, business insolvencies in Canada are 162.5% higher, with Ontario (+232%), BC (+184%), Quebec (+136%), and Alberta (+123%). In Quebec and Ontario, the rise in business insolvencies is mainly the result of higher bankruptcies, and proposals are playing a bigger role in BC and Alberta.

In Alberta, insolvencies increased by 1.1% m-o-m sa. and are 9.9% higher compared to the same month last year. Over the past 12 months, there have been 18.3k insolvencies, the highest levels on record. On a seasonally-adjusted basis, the increase in insolvencies in January came from higher bankruptcies (+3.2% m-o-m sa) and proposals (+1.1% m-o-m sa). We note that the level of proposals is currently about 47% above its pre-pandemic level, while bankruptcies are 55% below pre-COVID. On the business side, insolvencies rose 45.2% compared to January of last year, with proposals up 89% and bankruptcies doubling compared to last year (+100.0% y-o-y).


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Independent Opinion

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