Blog Details

What Looms On The Horizon For Canada’s Small and Medium-sized Companies?

Will it be a hard landing, a soft landing or no landing at all?

By Todd Millar and Peter Andersen

Canada’s small and medium-sized businesses, the engine of the economy, had a tough time in 2023 and don’t expect 2024 to be much better.

But the usual portents of hard times – rising interest rates and inflation – didn’t have the usual results expected in recessionary times – lay-offs, business closures and bankruptcies. In fact, most of the 417 CEOs of SMEs polled in the latest survey by  TEC Canada  said no staff cuts were planned for this year and some even reported difficulty in recruiting workers.

This is despite the fact that some CEOs believe Canada is already in a recession while others think it’s still coming. The consensus view seems to be that if there is a recession it will have a soft landing, the economy will slow, but not too much. That’s their dream scenario.

But what if there is no landing at all in either Canada or the US? (After all, there can’t be a recession in Canada without a recession in the US.) What if Canada’s economy continues to grow at what would be a normal rate of perhaps two percent and inflation and interest rates stay more or less where they are, and this becomes the new normal?

The big worries underpinning this view are sticky inflation, wages in a catch-up mode as people try to restore the standard of living they had before the pandemic, and declining productivity.

And if profits are squeezed as a result of these pressures CEOs have a remedy according to the TEC Canada survey: raise prices of goods and services in the apparent belief that consumers will accept the hikes at a time when the rising cost of living is front and centre for most Canadians.

But at what point do consumers – and the government – say enough is enough as has already been seen with government intervention in the rising price of groceries and supermarket goods.

The Covid-19 pandemic changed the way we look at economic forecasting, particularly when it come to the job market. Without lay-offs there can’t be a recession. It’s that simple. We still have significant labour shortages and CEOs are telling us they don’t want to cut work forces and, on average, are looking at four to five percent increase in employee compensation this year.

Workers realize that without layoffs they need not necessarily worry about losing their job and are therefore being aggressive in pushing for higher wages, salaries and benefits. Wages are already up five percent on what they were a year ago and there hasn’t been a corresponding increase in productivity to offset wage cost pressures. In fact, productivity is declining, which is a big problem for SMEs in particular.

It’s significant that a strong majority – 80 per cent – of CEOs surveyed say they will increase capital expenditures over the next 12 months. It’s likely that a large percentage of that will be on high-tech as part of the tidal wave of high-tech investment brought on by the pandemic.

It’s also likely that the Bank of Canada will cut interest rates before the Federal Reserve in the US, but the apparent belief among CEOs that rates will come down quickly is probably misplaced for as long as we remain out of a recession. As for inflation, it’s come down from a year ago, but it will be hard to get it under three per cent.

So, what should SME CEOs do to steer a steady course in 2024? For one thing, they should avoid taking on more debt while interest rates remain. Cash is king in these tough times. Also, consider expenditures carefully and analyse the return before committing resources.

If 2024 is indeed the year of no landing, CEOs should look back at what they did well in 2023 and stay on that track.

Todd Millar is President and CEO of TEC Canada. Dr. Peter Andersen is an independent consulting economist and former Assistant Chief of the Bank of Canada’s Research Department.

Responses

Your email address will not be published. Required fields are marked *

Login

Welcome to CanadianSME Small Business Hub