Small business lagging in Canada, but has growth potential: CIBC

Small business activity in Canada is lagging the economy as a whole, but it has the potential to pick up and grow in the next five years, according to a new report from CIBC World Markets.

The report concludes that currency fluctuations have less impact on small and medium-sized businesses and notes that a meaningful drop in the Canadian dollar in relation to the American dollar has helped exports.

“Just as small and medium enterprises are less responsive to a rise in the value of the loonie, they are just as insensitive to Canadian dollar weakness,” said Benjamin Tal, the bank’s deputy chief economist and report co-author.

The Canadian dollar is currently worth about 89 cents U.S., down from about 97 cents U.S. a year ago.

The report identifies Alberta as the most favourable place in Canada for a small business to flourish as it has the strongest projected growth, while also possessing good demographics and immigration trends. “Those latter characteristics offer a steady stream of future entrepreneurs and workers to drive operations in tomorrow’s small and medium enterprises,” Tal said.

On the negative side, Tal continued, Alberta lacks an advantage in export orientation, “with a concentration in Alberta’s outbound flows in larger, energy-focused firms.”

British Columbia and Ontario ranked second and third, respectively, with a three-way tie for fourth between Saskatchewan, Manitoba and Quebec.

B.C.’s strong growth prospects, solid urban concentration and labour dynamics suggest that smaller enterprises can exploit emerging opportunities, Tal said.

While small firms in Ontario are well integrated into larger firms’ manufacturing supply chains, the province isn’t aligned to industries that are poised to see the highest growth, Tal noted. “It will need to work on its weaker readings on debt management to give firms the capital they need to expand toward industries with brighter prospects,” he said.

CIBC estimates that small businesses activity accounts for about 40 per cent of private-sector gross domestic product (GDP) in Canada.

Since the 2008-09 recession, small businesses have more than pulled their weight in growth and employment, the report noted. For example, since the recession, the study found the number of small businesses with between 20 and 49 employees has risen close to 18 per cent, while those with 10 to 19 employees is up by 12.5 per cent and those with less than 10 employees up by 10.3 per cent.

“While economic conditions have deteriorated for them recently, small businesses have been contributing a greater than normal share of hiring recently,” Tal said. “That’s partly because hiring in the rest of the economy has been muted, but small businesses have also been adding to their workforce at a greater rate than they have historically.”