Small business faces new reality and must look beyond domestic housing and consumer spending

TORONTO, Oct. 22, 2015 /CNW/ - Small businesses in Canada created no less than 80 per cent of all new private-sector jobs in the past year, but this economic piston of growth is in for tough times if it doesn't start to focus on innovation and growing export markets, finds a new report from CIBC World Markets.

"The small business sector has unequivocally kept Canada's economy from sinking into deeper water," says CIBC Deputy Chief Economist Benjamin Tal, who co-authored the report with Senior Economist Royce Mendes. "While Canada's small and medium-sized enterprises have been an island of stability, not only demonstrating resiliency during the recession but also leading the way during the recovery, they are entering a new reality, one that will force them to innovate and enter new markets to sustain growth."

Small businesses were quick to capitalize on the pickup in economic activity in Canada following the Great Recession with the number of new companies climbing nearly 19 per cent since 2007. During the same period, the pace of growth for large firms fell almost 3 per cent. In terms of employment, the number of people working in small and medium sized enterprises (SMEs)  increased three times faster than large companies.

"The secret behind this unprecedented ability of small business to overcome weak economic conditions over the past cycle is their exposure to Canadian consumers, who by opening their wallets, almost single-handedly moved Canada back into the growth column," says Mr. Tal.

"Low borrowing rates have been a large contributor in allowing consumers to continue spending, but the strength in Canada's housing market has also played a significant role by making consumers feel more wealthy."

The unprecedented strength in Canada's housing market has provided a major boost to Canada's SMEs, which employ close to 70 per cent of the workers in the construction and real estate industries. These two industries alone created more than 200,000 new jobs, accounting for 17 per cent of the labour market's strength since the beginning of 2010, the report says. It also notes that each housing sale generates an estimated $20,000 in additional consumer spending.

But Mr. Tal warns that too much reliance on the domestic market can be dangerous should the tide turn.

"With debt-to-income ratios just under 165 per cent and house prices looking stretched in many pockets of the country, consumers can't be relied on to provide the type of growth seen in the recent past. Canadians are just about maxed out on debt-fueled consumption."

With the dollar's flirtation with parity now a thing of the past and the slowdown in consumption in mind, Mr. Tal sees an opportunity for SMEs to gain exposure to export markets in particular the U.S. and Europe.

Only 10 per cent of Canadian SMEs are involved in exporting, a level that hasn't changed in 15 years despite increased trade activity and free trade around the world, he says.

Small businesses in Alberta, which will be the hardest hit by the drop in commodity prices, have the most room to add export capacity, as they generate far less revenue from exports than their peers in other provinces, Mr. Tal says.

"To maintain and build on the performance of the past cycle, SMEs will have to change their business models by both raising their propensity to export and increasing investment in research and development," he says.

The report notes that small business that are already exporters are starting from a position of strength as they have consistently invested more on innovation than non-exporters.

"Given Canada's weak productivity track record of late, any support from SMEs will be a boon to the country," says Mr. Tal.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if_2015-1022.pdf

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE CIBC