Small, mid-size firms outperforming the Canadian economy: CIBC World Markets

Oct 6, 2008


    More than 260,000 new businesses to launch by 2013

    TORONTO, Oct. 6 /CNW/ - CIBC (CM: TSX; NYSE) - Small and mid-sized
businesses outperformed the overall economy in the past year as Canadians
opened their own businesses at a fevered pace last year, a trend that will
continue to grow as the economy recovers in 2009, notes a new report from CIBC
World Markets.
    "We expect that over the coming five years, the average annual growth in
the number of small and mid-size businesses will exceed two per cent, leading
to the creation of no less than 260,000 new businesses by 2013," says Benjamin
Tal Senior Economist at CIBC World Markets in his latest Small Business
Report.
    Since the beginning of the decade, more than 300,000 small and mid-size
enterprises (SMEs) were launched, including 33,000 in 2007 alone, says Mr.
Tal, who found that their performance has been impressive. "Small businesses
were quick to capitalize on the acceleration in economic activity between 2005
and 2007, outpacing the overall economy by a full percentage point," says Mr.
Tal.
    And while slowing market conditions are impacting SMEs, he says the
sector is "for the first time in more than two decades" outperforming the rest
of the economy during a downturn. "This is significant given that
historically, SMEs led the overall economy into periods of slowdowns and, in
the process, suffered disproportionate hardship compared to larger firms. By
next year, as the economy begins to recover, SMEs in aggregate appear to be
well positioned to resume their traditional role as the pioneers of the
economic cycle."
    The well-documented breakneck pace of consumer spending last year is one
reason why small businesses have overcome weaker economic conditions, notes
Mr. Tal. However, another key driver has been the strong housing market, which
has given birth to 700,000 jobs since 2000. "With SMEs employing close to
70 per cent of workers in the construction and real estate sectors, the
benefit is obvious," says Mr. Tal, adding that the "levelling off in housing
activity in Canada will hurt the momentum in overall SME activity, but the
level of activity will remain at historic highs."
    The booming economy of Alberta produced the greatest percentage jump in
new SMEs in Canada last year. He notes that Ontario produced the second
largest climb "probably reflecting the growing reliance of the province on the
service industry as well as outsourcing activity as large corporations try to
cut costs."
    In Manitoba and Saskatchewan, the economic momentum has yet to be felt by
SMEs as the sector actually shrunk last year. However, Mr. Tal expects that
trend to reverse itself, and ultimately lead those provinces to record some of
the largest gains in SME activity in the years ahead.
    By city, the fastest rate of small business formation in 2007 was in
Sherbrooke, followed by Edmonton, Calgary and Toronto. Mr. Tal notes that all
of the growth in the SME sector in 2007 was in large urban centres, which saw
a strong 3.8 per cent increase in the number of businesses formed. The number
of SMEs in rural areas fell by more than two per cent.
    The contribution that SMEs make to the Canadian job market is sizeable
and continuing to grow, says Mr. Tal. "During the year ending March 2008,
firms with less than 100 employees created 130,000 new jobs accounting for
almost 39 per cent of jobs created in the economy. This is notably higher than
the 28 per cent contribution seen in early 2007."
    Mr. Tal's analysis also identifies significant demographic changes ahead
that pose challenges and benefits for the future of SMEs in Canada. Among them
is the advancing age of entrepreneurs.
    "Within the coming 15 years, more than half of the country's current
small business owners are expected to retire," says. Mr. Tal. And by 2013, "an
estimated $1.3 trillion in business assets is poised to change hands - the
largest turnover of economic control in generations. Accordingly, faulty
succession planning could have significant economic costs resulting from
reduced productivity, job losses, premature sales and increased bankruptcy
rates."
    He adds that another key challenge will be a shrinking labour market that
will make it increasingly difficult for SMEs to find qualified labour.
    A trend likely to benefit SMEs is the increasing consumer demand for
personalized products. "By their nature, small scale operations are flexible
enough to support the increased demand for personalized services given their
ability to focus on niche markets," says Mr. Tal.
    The growing call to think and act on a global scale will also likely
affect SME business plans. "Increasingly, firms are identifying foreign
markets and foreign sources of supply as important parts of their strategies
for growth and success," he adds. Heightening the export orientation of the
small business sector will be the Internet and an increasing number of
immigrant entrepreneurs with potential business connections to their countries
of origin.
    But with global business activity comes the need for SME owners to be
knowledgeable in trade and tax regulations, and foreign exchange risk, says.
Mr. Tal.
    His report also examined small and mid-sized businesses that have
consistently outperformed their peers in revenue growth and identified six
common key characteristics. They are:-   Having prior work experience in the industry;
    -   Using professional advisors such as accountants and bankers;
    -   Having business partners;
    -   Having a export market orientation
    -   Using modern technology; and
    -   Having a post-secondary education.The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/sbr-20081006.pdf

    CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
investment banking, and merchant banking to clients in key financial markets
in North America and around the world. We provide innovative capital solutions
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For further information:

For further information: Benjamin Tal, Senior Economist, CIBC World
Markets at (416) 956-3698, Benjamin.tal@cibc.ca; or Kevin Dove, Communications
and Public Affairs at (416) 980-8835, kevin.dove@cibc.ca


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