Small- and medium-sized enterprises (SMEs) in Canada could already be past their prime years as pioneers of economic recovery as they start to show telling signs of fatigue.
A CIBC Capital Markets report said these SMEs are on a rocky road and losing confidence and optimism.
"External shocks such as higher interest rates, a stronger Canadian dollar, rising minimum wages and potential tax policy changes will further test the durability of this critical segment of the Canadian economy," CIBC deputy chief economist Benjamin Tal said.
Large corporations' healthier cash positions and debt levels are helping them outperform SMEs in job creation, the economist said. This is particularly interesting as there are no major red flags in the Canadian economy. However, a close look puts into detail the fragility of such small businesses.
"Their confidence took a nosedive in the past few months, paving the way to a much softer economic reading in the second half of the year. And that reduced confidence is visible in the hiring momentum in the SME space," Tal explained.
Over the past two years, the rate at which SMEs created jobs was half of that seen amongst large corporations.
Despite the current challenges, the exit rate amongst SMEs remains on a downtrend, reflecting the longer survivability of these businesses. This comes as the number of new business entrants lessens and the average age of SMEs expands.
"The rising average age of SMEs is working to reduce the dynamism and growth potential of the entire sector, regardless of where we are in the cycle," Tal said.
Meanwhile, the report observed that SMEs with above-average revenue growth in the past five years are following three trends:
The first one is outsourcing. Firms which outsource work from other companies grow their yield 45% faster than firms without outsourcing work.
The second trend is export orientation. Firms that are export-oriented gain revenue expansion faster than those which are not.
Lastly, firms with an increased number of services and products saw, on average, stronger revenue growth and, by sector, service-oriented SMEs outperformed, including firms in financial information and recreation.
"This finding suggests that small business owners are able to adjust to an evolving marketplace by shifting products or services. At the end of the day, the key to success is the business model and the ability to adapt to changing market conditions," Tal said.
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