Expert analysis
Ufuk Akcigit, the Arnold C. Harberger Professor of Economics at the University of Chicago, explores the trends in more detail.
“Optimism is growing around the Canadian economy's prospects of avoiding a recession, a sentiment that mirrors the situation in the US. In February, the annual CPI inflation rate in Canada dropped slightly to 2.8% from January's 2.9%.
“Despite this, the Bank of Canada has decided to maintain its interest rate at the elevated level of 5% for another month. The start of 2024 has been marked by a notable increase in business insolvencies. The Canada Emergency Business Account (CEBA) program extended $60,000 loans to each of nearly 900,000 businesses to support them through the pandemic. Businesses were offered forgiveness of up to $20,000 on the loan if they repaid two-thirds of it by January 18. Failing that, the loan would convert to a three-year term loan with a 5% annual interest rate. In January, there was a surge in business insolvencies, more than doubling the figure from the same period a year earlier and even exceeding pre-pandemic levels for the month, according to data from the Office of the Superintendent of Bankruptcy. As businesses grappled with inflation rates higher than long-term averages, steep interest rates, and diminished consumer spending, the CEBA deadline served as a major challenge for many.
“This scenario is echoed in the annual change in small business employment during Q1/2024. According to the Intuit QuickBooks Small Business Index, there has been a marginal yearly employment decrease of -0.04% — though quarterly growth of 0.49% shows a glimmer of resilience. This is good news, but it should be seen in the longer-term context of persisting macroeconomic challenges, which continue to weigh heavily on small enterprises; evident in the long-term decline in small businesses’ overall share of employment from 32.4% in Q1/2015 to 30.2% in Q1/2024.
“In Ontario, a recent Equifax report shows rising mortgage delinquency rates. Over the past year, the rate soared by 135%, surpassing the national average of 52% more than twofold. Notably, this economic strain reflects the performance of small businesses in Ontario during Q1/2024, where we see quarterly employment down by 0.77% and by a substantial 4.02% annually. Conversely, the Prairies region had a robust start to 2024, boasting quarterly growth of 2.55% and yearly growth of 2.47%.
“Analyzing sectoral performance reveals notable trends. The accommodation and food services sector suffered the steepest quarterly decline at 0.98%, and a yearly decline of 0.85%. Meanwhile, the healthcare and social assistance sector faced the most significant annual decline of 3.18%. In contrast, the transport and warehousing sector emerged as a standout with impressive quarterly growth at 5.84% and remarkable yearly growth of 12.54%.
“Q1/2024 serves as yet another illustration of the increased susceptibility of small businesses to broader economic conditions illustrated by rising business insolvencies and mortgage delinquency rates. Despite the quarterly growth in small business employment, the small decline year-over-year signals the acute sensitivity of small enterprises to financial climates. Particularly for those heavily reliant on external financing, the scarcity or increased cost of credit poses significant hurdles. This dissonance underscores the distinct challenges faced by small businesses and emphasizes the imperative for tailored economic analyses and targeted policy interventions.”
