Small business activity in Canada moderating but demographics show opportunity to expand export orientation: CIBC

Strongest growth potential for small businesses are in Alberta and British Columbia

TORONTO, Oct. 20, 2014 /CNW/ - Small business activity in Canada is lagging behind the economy as a whole, but has the potential to pick up and grow in the next five years, especially in Alberta and British Columbia which provide the greatest advantages for startups, finds a new report from CIBC World Markets.

"Looking back at the recent history, we see that small business activity outperformed the broader economy in the earlier part of the recovery, but now at the more mature stage of the cycle, things are changing and small businesses are the ones lagging the economy as a whole," says Benjamin Tal, Deputy Chief Economist, CIBC, who coauthored the report with CIBC Economists Andrew Grantham and Nick Exarhos. "Exports have been on the upswing, helped along the way by a meaningful drop in the Canadian dollar below parity. 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."

The report finds that since the recession, small businesses have been getting larger, with the number of firms with 20-49 employees up close to 18 per cent, those with 10-19 employees 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," says Mr. Tal. "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."

Small businesses activity in Canada is an important part of the economy, accounting for about 40 per cent of private-sector gross domestic product.

Clearly, there are opportunities for small businesses to exploit, particularly given structural factors that favour the launching and growing of new endeavours. But increased export and import orientation points to greater complexity in doing business, putting increased pressure on small business in terms of price, quality, cost control, efficiency, marketing expertise, customer satisfaction and innovation, the report says.

The report identifies Alberta as the most favorable 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," says Mr. Tal. "The province does lack 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, says Mr. Tal.

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, he notes. "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," Mr. Tal says.

The provinces were scored on nine macro factors, with double weight added to expected economic growth given its importance:

• Economic growth - The extent to which the macro environment supports small and medium enterprise (SMEs) activity
• Urban/Rural Mix - The concentration of SMEs in large urban centres. Recent years have seen growth in SME formation in those areas outpace growth in rural areas.
• Labour Availability - The share of firms citing labour shortages as a source of restraint on their operations
• Net Exports Position - The balance of exports minus imports and a measure of sensitivity to the prospects of a weaker Canadian dollar
• Demographics - Growth in the 33-55 year-old age group. This age group has the highest propensity to become self-employed and start a business.
• Net Migration - The contribution of new immigrants to growth in the labour force, with the motivation here that new immigrants have a higher tendency to become self-employed.
• Sectoral Mix - The extent to which the fastest-growing sectors in the economy are also SME-friendly.
• Outsourcing Activity - The propensity by large corporations to outsource core activity.
• Debt Position - A measure of dependence on financing and a proxy for sensitivity to higher interest rates.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if-20141020.pdf

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SOURCE: CIBC World Markets