Domestic orientation better exposes them to ongoing fiscal and monetary
    stimulus

TORONTO, Oct. 5 /CNW/ - CIBC (CM: TSX; NYSE) - Canadian small- and medium-sized enterprises (SME) not only made it through the recent recession with less damage than in any other post-war recession, but they did so while outperforming their larger, more established, peers, finds a new small business report from CIBC World Markets.

The report found that by almost every measure, Canadian SMEs outperformed the rest of the economy during the recession and that trend is likely to continue. The total number of enterprises grew, employment held steady (compared to a 10 per cent drop among larger companies) and the number of bankruptcies decreased compared to the previous year. While CIBC's SME economic activity index saw a decline of three per cent (AR) during the year ending June 2009, the overall economy saw a much larger drop of 4.7 per cent (AR) during the same period.

"By almost any measure, Canadian SMEs surprised on the upside during the recent recession," says Benjamin Tal, senior economist, and author of the report. "The secret lies in the relative strength of the Canadian consumer. The consumer is the chief determinant of the destiny of a SME, and more confident consumers are a pre-condition for SME success. Canadian consumers are outpacing not only their American counterparts but also any other consumer sector in the G-7."

The report cites a number of key economic drivers that have helped Canadian consumers:

-  Unemployment duration in Canada, while rising, is still well below the
       level seen in any other G-7 country and at any equivalent point in
       previous recessions;
    -  Canadian households sit on three times more cash than in the U.S. as a
       share of market cap;
    -  Canadian income grew twice as fast as in the U.S. over the past two
       years; and
    -  The decline in Canadian net wealth since the beginning of the crisis
       was only a fraction of the drop seen stateside.

"After falling during the recession, consumer confidence in Canada has made a strong comeback, as opposed to the U.S. where confidence has only improved marginally from a deeper recessionary hit," says Mr. Tal. "Higher confidence means that every basis point cut in interest rates by the Bank of Canada achieves much more consumer spending here than stateside as Canadians are more willing to take on debt. So, not only is the financial sector in Canada in a much better position to provide credit, but Canadian consumers are in a better position to receive that credit as their balance sheets have not been as hard hit by housing market developments as their American counterparts."

The domestic orientation of most SMEs has also shielded the sector from the recent rise in the value of the Canadian dollar and will protect it from an expected weak export market in 2010. The report found that while a strong currency has a negative impact on the sector, the damage is much less significant than that seen among larger corporations. Only one in four SMEs in Canada are in sectors that are directly impacted by a stronger dollar.

Mr. Tal expects that SMEs will continue to play an increasingly important role alongside large corporations in the Canadian economy. "While many view SMEs and large organizations as separate and at times competing entities, this could not be further from the truth. Canadian SMEs are in a co-evolutionary relationship with corporate businesses in the economic landscape.

He found that corporate outsourcing is also playing a significant role behind SME success with one in two Canadian businesses beginning operation after receiving their first outsourcing contracts. He also notes that two in three Canadian SMEs could not have begun operations or survived without outsourcing.

As part of his research, Mr. Tal identified eight macro factors to assess which provinces are most likely to benefit from the projected structural increase in SME activity. For each province, he aggregated the findings and calculated a score that indicates relative prospects for SMEs.

His research found that Alberta has emerged as the most promising province for SME growth in the coming five years, closely followed by Ontario. "SMEs in Alberta will benefit from above average economic growth and a favourable industry mix. At the same time, while Ontario's overall economy will see below average economic growth, it is still enjoying SME-friendly industry growth, a high concentration of SMEs in the province's urban centres as well as strong outsourcing activity and a relatively strong growth in the 35-55 age cohort."

The report also notes that SMEs in Ontario are the most vulnerable to the impact of a stronger dollar - largely due to the province's large exposure to the U.S. and its reliance on the auto industry. In addition, disproportionately high numbers of SMEs in Ontario are indirectly linked to large exporting corporations. He finds that SMEs in Alberta, like those in Saskatchewan, and Newfoundland & Labrador, are less sensitive to the potential damage of a stronger dollar, in part due to their reliance on the oil & gas sector.

"British Columbia, the province with the largest economic contribution from small business, will remain an attractive spot for SMEs due to economic growth that is likely to match the national average, high small business survival rates, and a projected strong inflow of new immigrants," states Mr. Tal. He notes that British Columbia is also highly sensitive to a rise in the dollar, mainly as a result of its reliance on the forestry industry.

"Quebec will remain a strong base for small business in the coming five years, largely due to its expanding service industry and high level of cooperation between large companies and SMEs," he adds. He finds that the surprisingly high rate of dollar sensitivity among SMEs in the province is likely due to its reliance on the forestry industry and its indirect exposure to the U.S. market via Ontario.

Saskatchewan ranked fifth with above national average projected growth but it is held back by a less favourable sectoral mix and a high concentration of SMEs in rural areas. In Manitoba, the economy will be able to provide small business with a gradually improving environment, but the large number of SMEs in rural areas and no significant inflow of new immigrants will limit its potential. Lower economic and lower sectoral growth mix will be the main factors limiting small business expansion in Atlantic Canada in the coming five years.

Macro Factors used in the Ranking of SME Activity by Province

    Momentum indicator - Growth in self-employment over the past three years.

    Economic Growth - The extent to which the macro environment supports SME
    activity.

    Sectoral Mix - The extent to which the fastest growing sectors in the
    economy are also SME-friendly.

    Urban/Rural Mix - The concentration of SMEs in large urban centers.
    Recent years have seen growth in SME formation in large urban centers
    outpacing growth in rural areas.

    SMEs Survival Rate - The likelihood that an SME survives beyond three
    years of existence.

    Net Migration - The contribution of new immigrants to growth in the
    labour force. The motivation here is that new immigrants have a higher
    tendency to become self-employed.

    Outsourcing Activity - The propensity by large corporations to outsource
    core activity.

    Age Structure - Growth in the 35-55 age group. This age group has the
    highest propensity to become self-employed.


                     -----------------------------------
                     Province                     Score
                     -----------------------------------
                     Alberta                       10.0
                     -----------------------------------
                     Ontario                        9.8
                     -----------------------------------
                     BC                             9.5
                     -----------------------------------
                     Quebec                         9.5
                     -----------------------------------
                     Saskatchewan                   9.2
                     -----------------------------------
                     Manitoba                       9.0
                     -----------------------------------
                     Nova Scotia                    8.8
                     -----------------------------------
                     PEI                            8.8
                     -----------------------------------
                     New Brunswick                  8.7
                     -----------------------------------
                     Newfoundland & Labrador        8.5
                     -----------------------------------

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/sb-20091005.pdf.

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