Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Insolvencies were mostly unchanged in February on a seasonally-adjusted basis. This follows a sharp increase in January that ended a declining trend in insolvencies that has been observed since the end of the summer despite continued strains on households’ finances due to a sharp rise in interest rates and continued deterioration in households’ purchasing power over the period.
Nevertheless, insolvencies remain close to the level reached in August. However, proposals (a renegotiation of terms) have increased sharply over the past year. As a result, they are now above their pre-pandemic level in all Western provinces: BC, Alberta, Saskatchewan, Manitoba, in addition of Ontario. We also note that the total level of insolvencies in BC is above its pre-pandemic one. This situation suggests a rise in households struggling with their debt load.
The question is whether households were delaying the inevitable last fall. Insolvencies tend to increase sharply in January, February and March, not seasonally adjusted. March is usually a strong month for insolvencies, and next month’s data could be important for the trend going forward.
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). Moreover, a slowing economy is likely to be associated with a rise in unemployment. 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, a strong recovery in the oil sector, with the value of oil production reaching an all-time high since mid-2021 (production value has averaged $11bn in 2022), 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. In addition, we note that the level of proposals (a renegotiation of terms) is well above its pre-pandemic one.
Insolvencies eased 1.0% m-o-m in February on a seasonally-adjusted basis, after a sharp jump higher in January. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 24.2% compared to the same month last year. This resulted from a 30.6% y-o-y rise in proposals and a 7.0% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province, with the most significant rises in Nova Scotia (+38.7% y-o-y), Manitoba (+31.9% m-o-m), Saskatchewan (+30.3% m-o-m), and BC (+27.9% y-o-y). PEI (+5.9% y-o-y), Newfoundland (+15.9% y-o-y), Alberta (+17.4% y-o-y), and New Brunswick (+23.7% y-o-y) saw the smallest, yet still large in most cases, increases. We note that the data for the Atlantic provinces have been very volatile in recent months, likely affected by the aftermath of hurricane Fiona, distorting both the y-o-y and m-o-m changes.
On a monthly basis, insolvencies declined by 1.0% m-o-m seasonally-adjusted (sa) in February. The details shows that proposals rose slightly on the month (+0.5% m-o-m sa), while bankruptcies were mostly unchanged (+0.0% m-o-m sa). At the provincial level, New Brunswick (+15.7% m-o-m sa), Quebec (+3.6% m-o-m sa), PEI (+3.1% m-o-m sa), and Manitoba (+2.4% m-o-m sa) saw the biggest increase in insolvencies, while they decliclined in Nova Scotia (-10.8% m-o-m sa), Ontario (-2.8% m-o-m sa), Alberta (-0.9% m-o-m sa), and Saskatchewan (-0.2% m-o-m sa).
Relative to 2019, insolvencies in Canada are still 18% lower. However, we note that the level of insolvencies in higher compared to pre-COVID by 2.5% in BC, while it is only slightly below in Saskatchewan (-1.0%), Manitoba (-1.1%) and Alberta (-2.5%). The level of insolvencies is still well below pre-pandemic in Nova Scotia (-39.7%), Newfoundland (-39.5%), PEI (-38.5%), and Quebec (-31.7%)
We note that the level of proposals in Canada remains slightly above its pre-pandemic level (+3.5%). The level of proposals is above its pre-COVID level in BC (+34%), Saskatchewan (+31%), Alberta (+22%), Manitoba (+19%), and Ontario (+3.7%). This suggests that an increasing share of consumers are facing financial stress.
In Alberta, insolvencies decreased by 2.5% m-o-m sa and rose by 17.4% compared to the same month last year. Over the past 12 months, there have been 15.7k insolvencies, still well below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the decline in insolvencies in February came from an decrease in both proposals (-3.9% m-o-m sa) and bankruptcies (-1.6% m-o-m sa.). We note that the level of proposals is currently about 22% above its pre-pandemic level, while bankruptcies are 54% below pre-COVID.
Independent Opinion
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