https://bonginoreport.com/economy/interest-rate-hikes-add-to-small-business-struggles

Fewer small businesses raising prices hints that inflation expectations may be coming down

News Analysis

Small businesses are acutely affected by the Bank of Canada’s rapid interest rate increases, as they are carrying more debt than usual due to the pandemic in addition to numerous other challenges they face. 

“It’s like a perfect storm right now in so many ways,” Catherine Swift, president of the Coalition of Concerned Manufacturers and Businesses of Canada, told The Epoch Times.

The Bank of Canada said it is front-loading its rate hikes, but Swift said it procrastinated in starting the rate-hike cycle. Financial markets were caught off-guard when the BoC didn’t raise rates back in January and some economists have said the BoC should have started raising rates in late 2021.

“When we finally saw the hikes, they had to be larger and faster than they would otherwise have been and therefore have more of a negative impact on the economy,” she said.

“I tend to think we are going to see a recession. I really do,” Swift, an economist, said.

The BoC has now raised its key rate by 3 percent in the last six months. The central bank is determined to get inflation back to its 2 percent target, but it noted that there will be “bumps along the way.” It added that, for many Canadians, higher rates add to the burden already faced by high inflation.

Multiple Headwinds

The Canadian Federation of Independent Business (CFIB) reported on Sept. 8 that 7 in 10 small businesses expect the BoC’s rate increases to have a negative impact on their operations, and 3 in 10 say that this impact will be significant.

“Although we understand that we need to fight inflation, we are seeing nonetheless that they [interest rate hikes] bite quite hard right now for a lot of businesses,” Simon Gaudreault, chief economist at CFIB, told The Epoch Times.

The CFIB reported that 62 percent of small businesses are still saddled with an average of $158,000 of pandemic debt and that a majority of small businesses have to deal with higher interest rates on commercial loans due to the BoC’s rate hikes. Where this manifests immediately is with lines of credit tied to the prime rate.

A small business is defined as one that has between one and 99 employees, whereas a medium-sized business has between 100 and 499 employees.

The sectors of the economy with the highest percentage saying the BoC rate hikes will have a significant impact are hospitality (41 percent), transportation (40 percent), and construction (35 percent).

Gaudreault explained that hospitality, being customer-facing, suffered disproportionately during the pandemic, while transportation got punished due to high fuel costs and construction was particularly dependent on the supply chain for materials.

“In a way, this encapsulates all of the current challenges that small businesses in Canada have at the moment,” he said.

Businesses are struggling with the elevated cost of inputs, hiring, rising wage demands, and price increases as inflation runs at an annual rate of greater than 7 percent.

“Supply constraints remain widespread here at home. Canadian businesses are not yet seeing major relief on the supply front,” said Bank of Canada senior deputy governor Caroline Rogers on Sept. 8.

Swift says small firms typically have very small margins and they’re going to have to try to increase prices, which can be difficult to do given the competitive environments in which they operate. 

“So in the short term of course, this will boost inflation a bit more, right? The perversity is the initial increases—until it dampens the economy, which of course is the point,” she said.

Messaging Getting Through

The Bank of Canada has been particularly wary of inflation expectations moving further away from 2 percent and of avoiding a situation where higher wage demands get built into longer-term contracts.

But Gaudreault says data collected by the CFIB on firms’ intentions to raise prices are one barometer for inflation expectations. And those intentions are coming down.

The CFIB reported that while small businesses have been raising prices, those price increases may have started to plateau and could drop in the future. The share of small businesses that reported wanting to raise prices by 6 percent or more dropped to 32 percent in August from a peak of 39 percent in June. 

“Many small businesses are considering smaller price increases (between 0.5 percent and 5.5 percent),” according to the CFIB.

Related Coverage

Also, businesses are adjusting to the challenges they face and perhaps adjusting to a “new normal,” Gaudreault says.

“Businesses have found a new way to source their things, or to reorganize their work to cope with the new reality. So perhaps that’s what’s happening—gradual adjustments on the small business side, and that might be why also their inflation expectations have eased,” he said.

Gaudreault added that it’s possible the BoC’s message of getting tough on inflation and to not build up higher expectations have been integrated into the small business mindset.

But even if the small business is adapting, Swift says there are a lot of structural issues in the economy such as job-seekers not having the right skills to fill the over 1 million open positions, employment in the public sector growing faster than in the private sector, and the government being heavily indebted. 

“We know so many businesses that have left a very small operation in Canada, whether it’s a warehouse or a head office with a handful of employees, but their main manufacturing facilities or whatever, are moved south of the border or offshore, and that doesn’t get reversed easily.”

Journalist

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

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