Exports Could Boost Growth For Small Businesses.

It’s been a mild recession for small businesses in Canada, but even though the economy remains healthy, the climate for these firms is about to get chillier.

That’s the warning from two economists at CIBC World Markets, Avery Shenfeld and Benjamin Tal, as they survey the dimming outlook for consumer spending and infrastructure programs, two of the key supports for smaller firms during the past couple of years.

As our economic recovery matures, the key drivers of growth are shifting to new areas: primarily exports and business investment.

A largely government-sponsored recovery is now so well-entrenched that we’ll soon see an end to infrastructure spending along with the likelihood that interest rates will begin rising, squeezing major purchases by consumers. If governments didn’t cut their stimulus programs, they’d dig themselves even deeper into debt. And interest rates must rise soon to minimize the risk of triggering an inflation problem.

Already, there are signs of weakening in consumer spending, with retail sales having declined in both December and January and existing home sales edging down in February.

This development poses a challenge for Canada’s smaller firms.

They did very well out of the rebound in construction, home sales and retail spending – so well, indeed, that this was the first recession on record when the number of business bankruptcies actually fell instead of rising, note Shenfeld and Tal.

And they also had a bit of good luck, Shenfeld says. The U.S. recession began nearly a year before Canada’s, giving companies here some time to slash costs and pile up cash reserves. That softened the downturn’s impact.

But the their luck will change as the economy’s growth shifts into areas that are largely dominated by bigger firms: exports and business investment – mostly in energy and manufacturing.

Some small businesses will do well out of the investment surge that Shenfeld and Tal expect to see this year, but they’ll likely be a minority. Winners could include those that offer business-to-business services – perhaps specialized software or machinery producers – as well as a certain number who’ll benefit indirectly from proximity to investment hot spots like Alberta’s oilsands.

The other big opportunity is exporting to a growing global market that’s increasingly propelled by emerging economies like those of China, India and Brazil.

This is more difficult than tapping our domestic market, but small firms all over the world have shown that it can be done, including many in Canada.

Unfortunately, the proportion of smaller Canadian companies that export is small, only about nine per cent. Even more discouraging, it has actually been shrinking. In 2000, the figure was nearly 11 per cent.

Shenfeld speculates that this could be a one-time phenomenon reflecting the stress on weaker exporters as the Canadian dollar shot up in value over the past decade, squeezing export profits.

Today, with the global economy recovering nicely from the recession, he and Tal see an opportunity for Canadian small business to jump back into the export game.

They point to at least two significant opportunities for us to do this.

First, Canada’s many new immigrants from emerging economies, especially from the fast-growing nations of South Asia, give us a base of potential entrepreneurs who have the advantage of knowing these markets.

Second, the U.S. is enjoying an export boom at a time when many multinationals in that country are outsourcing parts of their operations. Smaller firms from Canada could seek to supply these giants, gaining the growth from a globalizing world without having to penetrate an unfamiliar culture.

“I think Canada will deepen its ties with emerging markets,” a hopeful Shenfeld said yesterday. But he acknowledges that it will take time.

Source : montrealgazette.com