Canadian SMEs remain upbeat despite high cost of doing business

Wages are increasing as the labour shortage forces businesses to make jobs more attractive

Canadian SMEs remain upbeat despite high cost of doing business

Canada’s small and medium enterprises remain optimistic that the economy will improve but remain challenged by high inflation.

The cost of doing business continues to be elevated, although the latest Main Street Quarterly report by the Canadian Federation of Independent Business (CFIB) does show a feeling that inflation is moderating.

"While inflation is still too high, the quarter-over-quarter annualized rate of core inflation is forecasted at 2.8% for Q2. This is within the Bank of Canada's 1% to 3% target range and therefore supports its decision to pause interest rate hikes," said Simon Gaudreault, CFIB's chief economist and vice-president of research.

However, he added that the recent decision by OPEC+ to cut oil production may add further costs to energy bills.

Private investment is forecasted to contract by -4.7% in Q1 and -1.5% in Q2, reflecting the challenging financial environment for small businesses.

Crucially, most respondents believe that a recession will be avoided in the first half of 2023, with a growth rate of 2.5% in Q1 and 1.2% in Q2. This is at odds with some economists’ expectations.

Wage budgets rising

One of the main drains on small business budgets is labour costs. The talent shortage is forcing employers to increase wages. In the first quarter, average wage increase plans were at 3.1%, having fallen from a 3.4% peak in Q2 2022.

Those businesses with labour shortages are looking at an average 3.8% increase in their wage plans, while those without are planning to increase by 2.4%.

The national private sector job vacancy rate remained steady in the first quarter (4.7%), and 658,900 jobs went unfilled. Businesses in the personal services, construction and hospitality sectors continued to be the most affected by labour shortages with vacancy rates of 7.5%, 6.3% and 6.1%, respectively.

"Analysis and forecasts based on small business data support a case for cautious optimism as we're approaching the busy summer months. However, the costs of doing business remain historically high and the current business environment is unfavourable to pandemic debt repayment. Going forward, stronger revenues and more certainty will be essential to supporting a true business recovery in 2023," Gaudreault concluded.