Small business optimism on the rise

TORONTO—RBC Economics is reporting that Canadian small and medium-sized businesses (SMEs) more successfully weathered the recession relative to large firms in the private sector.

“Countering concerns that smaller enterprises are generally more impacted by economic downturns, we found that smaller businesses endured the recent recession better than their larger counterparts,” said Paul Ferley, assistant chief economist at RBC. “The relative success of private sector SMEs likely reflected lower exposure to external markets such as the U.S., which saw greater weakness compared to Canada’s domestic economy.”

The report focuses on private sector employment numbers—which the firm considers a key business indicator—and found that private SMEs in Canada with fewer than 300 employees were better able to cope with the recession and have been quicker to recover than larger enterprises. In addition, businesses depending on U.S. exports had a more difficult time than those more focused on the domestic market.

These results mesh with the Canadian Federation of Independent Businesses’ (CFIB) Business Barometer, an index that tracks confidence and outlook in Canadian SMEs.

The metric rebounded to 69.3 in december 2010, more than 5 points higher than November’s reading.

Any result over 50 indicates that more SMEs are feeling confident in their prospects than those that lack confidence, and in December it was manufacturing that led the way

“Interestingly, it wasn’t holiday retail spending that accounted for the brighter sentiment,” explained CFIB vice-president and chief economist, Ted Mallett. “Instead, a large improvement in optimism among manufacturers, natural resource businesses, financial services and personal services firms pushed the overall index upward.”

While Ontario showed it’s strongest signs of confidence since mark, with a 69.5 rating, results across the nation remained measurably positive. There was some retrenchment in the results from western provinces but business owners in Newfoundland and Labrador reported a very optimistic 72.3 rating.

Employment Performance

The RBC report showed employment at private SMEs fell 4.2 per cent during the recession, in contrast to 5.5 per cent among larger private firms. Compared to large manufacturers, private sector SMEs seem to have had lower exposure to markets in the U.S.

When looking at all firm sizes, private goods-producing industries including manufacturing, construction, mining, oil and gas, logging, forestry and utilities took the biggest hit to employment through the recession, declining 11.1 per cent from a fourth quarter peak in 2007.

Regional Findings

Trends in employment numbers at SMEs and large firms were found in most provinces across the country.

• Newfoundland & Labrador: SME employment in the region remained strong during the economic downturn. Though payrolls declined by 1.2 per cent, employment at large firms declined more sharply at 4.3 per cent. Manufacturing bore the brunt of the declines with total employment falling by 29.2 per cent, accounting for 90 per cent of the overall decline at large firms.
• Nova Scotia: Employment in Nova Scotia was stable throughout the recession, although employees at large firms fared better than SMEs as payrolls reduced by 1.7 per cent and 2.9 per cent respectively. The domestic trade sector was the main source of weakness among SMEs, accounting for 44 per cent of job losses in this category.
• New Brunswick: Manufacturing was the main source of job loss in New Brunswick with employment in this sector falling by 11.3 per cent between the third quarter of 2008 and the second quarter of 2009. Overall, employment among SMEs contracted 13.2 per cent compared to a drop of 9.6 per cent at large firms.
• Quebec: Employment at large firms in Quebec fell 6.2 per cent, with more than half of the decline coming from manufacturing, while employment at private SMEs fell 2.6 per cent after peaking at the end of 2008. Transportation and warehousing sectors experienced general weakness with employment falling at SMEs and larger firms by 7.3 per cent and 5.7 per cent respectively.
• Ontario: Job losses in Ontario’s manufacturing sector were responsible for half of the decline in total private-sector employment from the third quarter of 2008 to the fourth quarter of 2009. Within manufacturing, job losses were concentrated at large firms where employment fell by 19.2 per cent during this period, compared to a decline of 10.4 per cent at SMEs.
• Manitoba: Employment at Manitoba’s private SMEs held steady throughout the recession as larger firms reduced payrolls. Employment losses were concentrated within manufacturing, which accounted for the entire 1.5 per cent decline in employment at SMEs and one-third of the 8.1 per cent reduction in payrolls at large firms.
• Saskatchewan: While employment at larger firms plunged by 10.5 per cent, private SMEs increased payroll by 1.8 per cent after initially falling 0.7 per cent. The decreases at large firms were more broadly based compared to other provinces and were led by declines in manufacturing (20.4 per cent) and transportation and warehousing (22.3 per cent).
• Alberta: Private employment at SMEs in the province dropped 7.4 per cent compared to 5.6 per cent among large firms. The employment rate in the manufacturing sector of large firms fell by 19 per cent, whereas SMEs cut payrolls in the manufacturing sector by a more moderate 13.1 per cent.
• British Columbia: Similar to Alberta, large firms in British Columbia generally outperformed their SME counterparts. Though private employment at large firms dropped 7.4 per cent peak to trough compared to the 6.9 per cent decline at SMEs, a subsequent rebound at large firms currently leaves the drop at 5.7 per cent. Manufacturing in the province was weak with SME employment falling by 11.4 per cent, although this was outpaced by a 14.3 per cent decline at large firms.

Read the full RBC Economics small business report.