Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Insolvencies decreased in December on a seasonally-adjusted basis and appear to have stabilized close to the level that prevailed before the start of the pandemic. Nevertheless, proposals (a renegotiation of terms) are almost 20% above their pre-pandemic levels at the national level and significantly higher in many provinces. 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, are rising fast and reaching levels not seen since 2011, indicating an increasing share of businesses are struggling (Fig 6).
The next few months are likely to be interesting for insolvencies. 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. Moreover, we will be looking to see whether the CEBA repayments in January may lead to more business bankruptcies.
Record levels of household debt, declining purchasing power due to rising inflation, and the sharp rise in interest rates are putting pressures 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 due to underperforming wages and income gains. In addition, we note that the level of insolvency is close to record highs and proposals (a renegotiation of terms) are well above their pre-pandemic level.
Insolvencies declined 3.7 % m-o-m in December on a seasonally-adjusted basis. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 19.9% compared to the same month last year. This resulted from a 20.6% y-o-y rise in proposals and a 17.7% y-o-y increase in bankruptcies. It’s important to note that proposals represent about 77% of total insolvencies. Compared to last year, insolvencies increased in every province except PEI where they are 25% lower (a spike in PEI in December last year explains the sharp decline). Insolvencies had the most significant rises in Quebec (+33.4% y-o-y), Ontario (+20.1% y-o-y), BC (+17.3% y-o-y), and Alberta (+16.8% y-o-y). The smallest increases were in Manitoba (+0.4% y-o-y), New Brunswick (+3.5% y-o-y), Nova Scotia (+6.9% y-o-y), and Saskatchewan (+7.2% y-o-y).
On a monthly basis, insolvencies dropped by 3.7% m-o-m seasonally-adjusted (sa) in December. The details show that the lower number was due to a decline in proposals (-404% m-o-m) and in bankruptcies (-2.1% m-o-m). At the provincial level, insolvencies declined in all provinces except in Newfoundland (+7.7% m-o-m). The biggest drops were in Manitoba (-17.0% m-o-m), PEI (-12.1% m-o-m), Saskatchewan (-7.5% m-o-m), and BC (-7.0% m-o-m).
Relative to 2019, insolvencies in Canada are 7.5% lower and appear to have stabilized in recent months. However, we note that the level of insolvencies is higher compared to pre-COVID in BC (+16.0%), Alberta (+11.1%), Manitoba (+1.7%), Saskatchewan (+1.7%), and Ontario (+0.2%). The level of insolvencies is still well below pre-pandemic in PEI (-47.5%), New Brunswick (-33.8%), Nova Scotia (-31.8%), Newfoundland (-26.3%), and Quebec (-23.8% m-o-m).
We note that the level of proposals in Canada is well above its pre-pandemic level (+19.0%). The level of proposals is also above its pre-COVID level in most provinces. It is the most above 2019 levels in BC (+52.9%), Alberta (+45.6%), Saskatchewan (+40.6%), Manitoba (+38.7%), and Ontario (+18.6%).
Business insolvencies increased 3.6% m-o-m seasonally-adjusted in December (57.2% y-o-y) and are reaching levels not seen since 2011. The rise in business insolvencies, which represent only 4% of total insolvencies, is mainly due to a rise in bankrupcies (+9.3% m-o-m sa. and 75.6% y-o-y). Rising insolvencies, especially bankruptcies, in Quebec (+64%), Ontario (+66%) and BC (+63%) are the primary drivers of this trend. The sectors most affected are accommodation and food services, retail trade and construction.
In Alberta, insolvencies declined by 5.9% m-o-m sa. and are 16.8% higher compared to the same month last year. Over the past 12 months, there have been 18.1k insolvencies, the highest levels on record. On a seasonally-adjusted basis, the decrease in insolvencies in December came from lower bankruptcies (-8.1% m-o-m sa) and proposals (-3.5% m-o-m sa). We note that the level of proposals is currently about 46% above its pre-pandemic level, while bankruptcies are also 57% below pre-COVID. On the business side, insolvencies were flat compared to December of last year, with proposals down 57%, but bankruptcies up by 19%.
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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.