Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Insolvencies eased again in July on a seasonally-adjusted basis, despite the decline in July, insolvencies remain on an rising trend and 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.
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 further rises 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 above their pre-pandemic one.
Insolvencies eased 0.5% m-o-m in July on a seasonally-adjusted basis, after decline in June. Insolvencies, which include both bankruptcies and proposals (a renegotiation of terms), rose by 22.0% compared to the same month last year. This resulted from a 28.5% y-o-y rise in proposals and a 4.0% y-o-y increase in bankruptcies. Compared to last year, insolvencies increased in every province, except in PEI where they are flat. Insolvencies had the most significant rises in Manitoba (+39.1% y-o-y), Newfoundland (+31.9% y-o-y), Ontario (+28.2% y-o-y), and Quebec (+21.0% y-o-y). Saskatchewan (+2.4% y-o-y), Alberta (+12.7% y-o-y), and Nova Scotia (+15.0% y-o-y) saw the smallest, yet still large in most cases, increases.
On a monthly basis, insolvencies eased 0.5% m-o-m seasonally-adjusted (sa) in July. The details show the decline was mainly due to lower bankruptcies (-3.0% m-o-m sa), while proposals rose modestly (0.1% m-o-m sa). At the provincial level, insolvencies decreased the most in Saskatchewan (-19.3% m-o-m), PEI (-14.1% m-o-m), BC (-7.2% m-o-m), and Alberta (-3.9% m-o-m). These declines were partly offset by significant rises in Manitoba (+18.8% m-o-m), Newfoundland (+10.6% m-o-m), New Brunswick (+5.7% m-o-m), and Ontario (3.5% m-o-m).
Relative to 2019, insolvencies in Canada are 6.2% lower, but remain on a rising trend. However, we note that the level of insolvencies is higher compared to pre-COVID in Manitoba (+32.4%), BC (+14.2%), Alberta (+5.6%), Ontario (+3.5%), and Saskatchewan (+2.6%). The level of insolvencies is still well below pre-pandemic in PEI (-33.8%), Nova Scotia (-25.8%), Quebec (-23.3%), Newfoundland (-20.1%), and New Brunswick (-15.0%).
We note that the level of proposals in Canada is well above its pre-pandemic level (+22.3%). The level of proposals is also above its pre-COVID level in all provinces, except in Newfoundland -1.6%) and (Quebec (-0.3%). It is the most above 2019 levels in Manitoba (+86%), BC (+49%), Alberta (+40%), Saskatchewan (+31.5%), New Brunswick (+28%), and Ontario (+24%). This suggests that an increasing share of households are facing financial stress.
In Alberta, insolvencies declined by 5.6% m-o-m sa, but are 12.7% higher compared to the same month last year. Over the past 12 months, there have been 16.8k insolvencies, the highest since March 2020, but still below their pre-pandemic levels of 17.2k. On a seasonally-adjusted basis, the increase in insolvencies in July came from a decrease in proposals (-2.6% m-o-m sa) and bankruptcies (8.6% m-o-m sa). We note that the level of proposals is currently about 40% above its pre-pandemic level, while bankruptcies are 58% below pre-COVID.
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