Rising interest rates join ‘perfect storm’ for small businesses

Decrease in small businesses raising prices suggests inflation expectations may fall

news analysis

Small businesses have been severely impacted by the Bank of Canada’s rapid interest rate hikes as they are carrying more debt than usual due to the pandemic plus many other challenges they face.

Katherine Swift, Chairman Association of Related Manufacturers and Companies in Canadatold the Epoch Times.

The Bank of Canada said it was accelerating rate hikes, while Swift said it delayed the start of the rate hike cycle. Financial markets were caught off-guard when the BoC failed to raise interest rates January Some economists also say the BoC should have started raising rates in the second half of 2021.

“When we finally saw rate hikes, they had to be bigger and faster than the other way around, so they had to have more of a negative impact on the economy,” she said.

“I tend to think we’re going to have a recession. I really do,” said economist Swift.

The BoC has now raised key interest rates by 3% in the last six months. The central bank is determined to return inflation to its 2% target, butbump into on the wayHe added that for many Canadians, higher interest rates would add to the burden of already facing high inflation.

multiple headwinds

of Canadian Federation of Independent Business (CFIB) Seven in ten SMEs expect a BoC rate hike to have a negative impact on their business, and three in ten say the impact will be significant.

“We understand that we need to fight inflation, but nevertheless [interest rate hikes] CFIB chief economist Simon Gaudreault told The Epoch Times.

The CFIB reports that 62% of SMEs still have an average of $158,000 in pandemic debt, with most SMEs having to deal with rising interest rates on commercial loans due to BoC rate hikes. Where this quickly emerges is a line of credit tied to the prime rate.

Small businesses are defined as businesses with 1 to 99 employees, and medium businesses are defined as businesses with 100 to 499 employees.

Hospitality (41%), transport (40%) and construction (35%) were the most likely economic sectors to be impacted by a BoC rate hike.

Gaudreault explained that customer-facing hospitality has been disproportionately hit during the pandemic, with transportation penalized for high fuel costs and construction particularly dependent on material supply chains.

“In some ways, this sums up all the challenges facing small businesses in Canada right now,” he said.

Firms are struggling with rising costs of inputs, employment, wage demand and inflation amid inflation of over 7% per annum.

“Supply constraints are still widespread here in the country. Canadian businesses have yet to see any significant easing on the supply side,” said the senior vice-president of the Bank of Canada. caroline rogers September 8th.

Small businesses typically have very low profit margins and should try to raise prices, Swift said, but given the competitive environment in which they operate, this can be difficult.

“Of course in the short term, this will push inflation up a bit more? Perversion is the first increase before weakening the economy, and of course that’s the point,” she said.

exchanging messages

The Bank of Canada is particularly vigilant to avoid a situation in which inflation expectations stray further from 2% and higher wage demands are embedded into long-term contracts.

But Gaudreault said the data collected by the CFIB on firms’ price hike intentions is one barometer of inflation expectations. And those intentions are going down.

The CFIB reports that while small businesses are raising prices, those price increases are beginning to plateau and may decline in the future. The percentage of SMEs who said they would like to raise prices by more than 6% fell from a peak of 39% in June to 32% in August.

According to the CFIB, “many small businesses are considering smaller price increases (between 0.5% and 5.5%).”

And companies are adapting to the challenges they face, Gaudreault says, and perhaps adapting to the “new normal.”

“Companies have found new ways to source things and reorganize work to cope with the new reality. , which may be why their inflation expectations have also eased,” he said.

Gaudreault added that the BoC’s message about being tough on inflation and not raising expectations may be embedded in the mindset of SMEs.

But even as small businesses adapt, job seekers don’t have the right skills to fill more than a million vacancies, and public sector employment is growing faster than the public sector. There are many structural problems in the economy, says Swift. The private sector, and governments, are heavily indebted.

“We know so many companies that have left very small operations in Canada, whether it’s a warehouse or a headquarters with a few employees, but have a major manufacturing facility or Others have been moved south of the border or offshore.

Rahul Vaidyanath


Rahul Vaidyanath is a journalist for The Epoch Times in Ottawa. His areas of expertise include the economy, financial markets, China, and national defense and security. He has worked in Bank of Canada, Canada, Mortgage and Housing, Corporation, Investment Banks in Toronto, New York and Los Angeles.