Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Insolvencies’ upward trend seems to have accelerated in June. While the level remains lower than before the pandemic, there are clear signs that insolvencies are rising fast. Moreover, despite the overall level of insolvencies remaining low, proposals (a renegotiation of terms) have increased sharply in recent months and are now above their pre-pandemic nationally and in Saskatchewan, Alberta, Manitoba, BC, and Ontario. This situation suggests a rise in households struggling with their debt load, even before the Bank of Canada hiked rates by 100bp in July.
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). All those factors are pointing to a continued rise in insolvencies in the coming months. The question is whether the strength of the labour market, with the lowest unemployment rate on record, and the vast amount of saving accumulated during the pandemic, estimated at $320bn, will provide some relief.
In Alberta, a strong recovery in the oil sector, with the value of oil production reaching an all-time high since mid-2021 (record production value of $14bn in March 2022), and the associated tailwind on income and confidence, 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. We already note that the level of proposals (a renegotiation of terms) is above their pre-pandemic levels.
Insolvencies jumped to their highest level since March 2020 in June, at the start of the pandemic. Nevertheless, their number remained well below their pre-COVID levels. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 20.1% compared to the same month last year. This resulted from a 30.8% y-o-y increase in proposals, while bankruptcies were down 2.2% y-o-y. Compared to last year, insolvencies increased in every province except in New Brunswick (-8.8% y-o-y). The increase was the most significant in Nova Scotia (+46.3% y-o-y), Saskatchewan (+45.8% y-o-y), PEI (+36.7% y-o-y), and Ontario (+27.9% y-o-y).
On a monthly basis, insolvencies rose by 13.5% m-o-m seasonally-adjusted (sa) in June, the biggest monthly increase since 2013. The higher insolvencies were led by an increase in both proposals (+11.6% m-o-m sa) and in bankruptcies (+9.4% m-o-m sa). The rise in insolvencies on the month was led by Nova Scotia (+26.2% m-o-m sa), Saskatchewan (+22.0% m-o-m sa), Ontario (+15.7% m-o-m), and PEI (13.6% m-o-m).
In Alberta, insolvencies rose by 4.7% m-o-m sa and edged higher by 13.1% compared to the same month last year. Over the past 12 months, there have been 14.2k insolvencies, still well below their pre-pandemic levels of 17.2k. The increase in insolvencies in June, on a seasonally-adjusted basis, came from a rise in both proposals (+6.7% m-o-m sa) and bankruptcies (+6.6% m-o-m sa.). However, we note that the level of proposals is now well above its pre-pandemic level and rising.
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