Small business outlook positive, but threats loom

Its been an eventful three years for Canadian small businesses, and while the economy remains bumpy, there are signs that Canada's small business sector is riding it out and gaining strength. But faced with the financial uncertainty of the global markets right now, the big question is whether to hunker down again or invest in growth.

Earlier this year, the federal government designated 2011 the Year of the Entrepreneur. It was as much a way to say thank you to small businesses for their efforts thus far as it was a recognition of the support needed by a key driver of Canadas economic future.

After Lehman Brothers collapse in September 2008, the global economy was thrown into freefall. The domestic economy fared OK, but all-important export markets dried up as manufacturers fearful of making too many new products and retailers wary of unsellable inventorycut back on what they bought from Canadian suppliers. Even those lucky enough to have ready and willing customers were hit by a lack of capital, and companies either froze their staffing levels or started painful layoffs.

By late 2009, things were looking up as most of the developed world lurched slowly out of recession, and job numbers recovered. But then came the European debt crisis and Americas debt ceiling debate in early 2011, and the global economy was thrown for another loop. The stock markets took a dive in late September, further spooking consumers and entrepreneurs alike, and some economists are predicting a double-dip global recessionor worse.

In the face of uncertainty like that, whats the best business strategy for a small business owner these days?

It depends who you ask.

Cautious optimism

"For the first time in the postwar era," CIBC economists wrote in a recent report, "Canadas small businesses outperformed their larger corporate counterparts during the last recession."

Thats largely because small businesses, for the most part, have deeper roots in the domestic economy than their corporate counterparts. And Canadas domestic economy fared comparatively better than others did during the slowdown.

In general, the small businesses that did well during the recession were ones that had their financial houses in order going in, had little debt, and were therefore able to benefit from low interest rates.

"The good ones had learned to reduce expenses," says Jean-Rene Halde, CEO of the Business Development Bank of Canada, the federal government agency mandated to help fund entrepreneurs. "They were relatively lean and mean heading into the recession."

And anything related to real estate and retailing two sectors that are closely tied to the vagaries of low rates have done particularly well for themselves, CIBC notes.

But the latest economic data shows both retail sales and home prices are starting to sour. So even small businesses that have thrived will have to adapt again in orderto put in a repeat performance if the economy hits another rough patch.

Mike Michell is the national small business director at Canadas biggest bank, the Royal Bank of Canada. "Theres no one sector that pops out," in terms of which businesses will deliver solid performance if the economy slows again, he says.

That means the winners of tomorrow are just as likely to be manufacturer as they are tech startups, he adds. So theres no silver bullet for success in turbulent economic times beyond smart planning.

If there is a trend, its that the banks customers are taking advantage of low rates and investing in their businesses if they can secure loans an encouraging sign no matter what, Michell says.

'I cant see Canada having too much leeway to raise [rates] ' CFIB president Catherine Swift

Certainly, interest rates dont seem like theyll be rising any time soon.

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have been warning Canadians for months that rates have nowhere to go but up. And yet, the rate remains at 1 per cent the same level its been at for more than a year now. Many inside the central bank and at other financial institutions would no doubt dearly love to hike rates, but with anemic growth and serious economic troubles overseas, theres little they can do.

"The fact that the Fed has said theyre going to hold steady until 2013 at least, I cant see Canada having too much leeway to raise [rates] either," says Catherine Swift, the president of the Canadian Federation of Independent Business.

With 108,000 members across the country, the CFIB is the largest organization for Canadian small businesses. In general, its members have a cautiously optimistic view, Swift says.

"The good news is, I always look at employment ahead of any other indicators, and on that front theres some hope," Swift adds.

Granted, data showing Canada created essentially no net new jobs in August was disappointing. But in general, Canadian employment is trending in the right direction. Statistics Canada says weve added 223,000 new jobs in the past calendar year, and as the current federal government is fond of reminding us, Canada is the only G8 country to have completely replaced all the jobs lost during the recession.

"So far what were seeing is small businesses hanging on, keeping the people theyve got, and in some cases ramping up" Swift says. "To me, thats the good news story."

Indeed, data from Royal Bank also hints at an upbeat outlook for small business owners. The banks latest survey says two-thirds of them are planning to invest in their company over the next two years. A lot of that will take the form of new technology and equipment, but more than 10 per cent of owners said they plan to hire more employees.

"Even in an unsettled economy, most small business owners are investing in their operations," Michell says. And low interest rates are a driving factor of that, he adds.

The survey polled 1,400 small business owners who deal with the bank, and the results areemblematic of the cautious optimism that pervades at the grass-roots level.

CFIBs own data shows about 12 per cent of its members say they plan to hire additional full-time staff in the next three or four months. Thats certainly good news, but other CFIB numberse don't paint anentirely rosy picture.

The CFIBs Business Barometer index dropped to 61.7 in August, down from 68.3 in July. Thats the lowest reading since July 2009 and it indicates small business owners know theyre not out of the woods yet. A reading of above 50 implies respondents expect their businesses will grow, not contract, in the next year. The higher above 50 the number, the more optimism pervades.

'We dont live on an island and if our big brother is sick, its going to affect us too' BDC president Jean-Rene Halde

A weaker showing is perhaps not expected considering the time frame entrepreneurs were questioned as the U.S. debt ceiling debate was underway, and Europes sovereign debt crisis reached its most recent nadir.

It's not hard to see why businesses aren't bursting with enthusiasm about their prospects for the immediate future.

"Most entrepreneurs cannot connect quantitative easing and European debt to how it will impact their business," Halde says. "Entrepreneurs are cautiously optimistic about their own firms. But we dont live on an island and if our big brother is sick, its going to affect us too."

Whether our big brother is on the road to recoveryorabout to suffer a relapse is anyone's guess at this point.

As the CFIBs Swift puts it: "Every time things seem to get better, we end up getting whacked again."