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

Bottom line

Insolvencies rose sharply in May on a seasonally-adjusted basis and followed a modest moderation in April, but this year’s monthly increases have been significantly stronger than historical patterns. This situation suggests a rising in the number of households struggling with their debt.

With the surge in May, insolvencies are at their highest level since the start of the pandemic. As such, proposals (a renegotiation of terms) are now above their pre-pandemic levels at the national level and in every province. We also note that the total level of insolvencies in Manitoba, BC, Alberta, Ontario, and Saskatchewan is above its pre-pandemic one; all provinces with higher than average levels of debt-to-disposable income.

May has historically been a quiet month for insolvencies, but the increase in 2023 has been more significant than usual in almost every province. (see fig. 5). This situation could be a correction after a small decline in April. However, so far this year, the monthly increases have been notably bigger than historically and suggest a fast rising trend in insolvencies.

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 consumers. Moreover, previous rate hikes have not yet fully filtered through to household borrowing. All those factors point to a rise 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 well above its pre-pandemic one.

Insolvencies surged 12.3% m-o-m in May on a seasonally-adjusted basis, after easing slightly in April, reaching their highest level since February 2020 or the start of the pandemic. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 30.9% compared to the same month last year. This resulted from a 35.5% y-o-y rise in proposals and a 8.8% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province, with the most significant rises in Manitoba (+54.6% y-o-y), Nova Scotia (+49.5% y-o-y), Newfoundland (+40.9% y-o-y), and Ontario (+33.7% y-o-y). Saskatchewan (+13.8% m-o-m), PEI (+17.1% y-o-y), Alberta (+17.6% y-o-y), and New Brunswick (+23.7% y-o-y) saw the smallest, yet still large in most cases, increases.

On a monthly basis, insolvencies rose by 12.3% m-o-m seasonally-adjusted (sa) in May, but follows a slight decline in April. The details show that both proposals (+11.6% m-o-m sa) and bankruptcies (+17.6% m-o-m sa) rose on the month. This was the strongest monthly seasonally-adjusted increase in bankruptcies since January 2013, with strong increases in most provinces. At the provincial level, Manitoba (+21.9% m-o-m sa), New Brunswick (+20.9% m-o-m sa), Nova Scotia (+14.7% m-o-m sa), and Alberta (+14.1% m-o-m sa), while PEI was the only province to see a decline on the month (-5.0% m-o-m sa) and Saskatchewan (-4.4% m-o-m sa).

Relative to 2019, insolvencies in Canada are 4.1% lower, but rising fast. However, we note that the level of insolvencies is higher compared to pre-COVID in Manitoba (+35.4%), BC (+17.0%), Alberta (+7.3%), Ontario (+2.9%), and Saskatchewan (+0.3%). The level of insolvencies is still well below pre-pandemic in PEI (-27.8%), Quebec (-20.4%), New Brunswick (-18.8%), Nova Scotia (-18.3%), and Newfoundland (-18.1%).

We note that the level of proposals in Canada is above its pre-pandemic level (+22.6%). The level of proposals is also above its pre-COVID level in all provinces led by Manitoba (+66%), BC (+54%), Alberta (+35%), Ontario (+25%), Saskatchewan (+25%), and Nova Scotia (+21%). This suggests that an increasing share of households are facing financial stress.

In Alberta, insolvencies rose by 14.1% m-o-m sa and by 17.6% compared to the same month last year. Over the past 12 months, there have been 16.4k insolvencies, the highest since April 2020, but still well below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the increase in insolvencies in May came from a surge in bankruptcies (+28.3% m-o-m sa) and a continued rise in proposals (+10.6% m-o-m sa). We note that the level of proposals is currently about 35% above its pre-pandemic level, while bankruptcies are 45% 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.