Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Insolvencies eased in June on a seasonally-adjusted basis, following strong increase in May. So far this year, monthly increases have been significantly stronger than historical patterns, suggesting a rise in the number of households struggling with their debt.
Despite the decline in June, insolvencies remain close to their highest level since the start of the pandemic. As such, proposals (a renegotiation of terms) are above their pre-pandemic levels at the national level and in almost every province. We also note that the total level of insolvencies in Saskatchewan, BC, Alberta, Manitoba, and Ontario, is above its pre-pandemic one; all of those provinces have higher than average levels of debt-to-disposable income.
June 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 eased 1.4% m-o-m in June on a seasonally-adjusted basis, after sharp increase in May. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 19.6% compared to the same month last year. This resulted from a 24.5% y-o-y rise in proposals and a 6.2% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province, with the most significant rises in BC (+38.4% y-o-y), New Brunswick (+32.3% y-o-y), Saskatchewan (+23.9% y-o-y), and Ontario (+22.9% y-o-y). Nova Scotia (+6.1% y-o-y), Newfoundland (+8.8% y-o-y), Québec (+10.7% y-o-y), and Alberta (+16.8% y-o-y) saw the smallest, yet still large in most cases, increases.
On a monthly basis, insolvencies eased 1.4% m-o-m seasonally-adjusted (sa) in June, but follows a large increase in May. The details show the decline was mainly due to lower bankruptcies (-6.0% m-o-m sa), while proposals only declined modestly (-0.6% m-o-m sa). At the provincial level, insolvencies decreased the most in Manitoba (-20.9% m-o-m sa), Newfoundland (-10.8% m-o-m sa), Quebec (-6.2% m-o-m sa), and Nova Scotia (-5.7% m-o-m sa). These declines were partly offset by rises in Saskatchewan (22.0% m-o-m sa), PEI (+7.0% m-o-m), BC (+5.3% y-o-y), and Alberta (+2.3% m-o-m sa).
Relative to 2019, insolvencies in Canada are 5.6% lower, but remain on a rising trend. However, we note that the level of insolvencies is higher compared to pre-COVID in Saskatchewan (+24.6%), BC (+24.0%), Alberta (+10.3%), Manitoba (+9.4%), and Ontario (+3.9%). The level of insolvencies is still well below pre-pandemic in Newfoundland (-27.6%), Quebec (-25.9%), Nova Scotia (-23.1%), PEI (-22.0%), and New Brunswick (-20.3%).
We note that the level of proposals in Canada is well above its pre-pandemic level (+22.4%). The level of proposals is also above its pre-COVID level in all provinces, except in Quebec (-7%) and Newfoundland (-3%). It is the most above 2019 levels in BC (+62%), Saskatchewan (+57%), Manitoba (+44%), Alberta (+43%), PEI (+36%), and Ontario (31%). This suggests that an increasing share of households are facing financial stress.
In Alberta, insolvencies increased by 2.3% m-o-m sa and by 16.8% compared to the same month last year. Over the past 12 months, there have been 16.7k 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 June came from a rise in proposals (+5.3% m-o-m sa), while bankruptcies declined 16.9% m-o-m sa). We note that the level of proposals is currently about 43% above its pre-pandemic level, while bankruptcies are 54% below pre-COVID.
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