Outlook positive for small business but challenges remain: TD Economics

    TORONTO, April 4 /CNW/ - Canada's economic and financial forecast bodes
well for small business owners in 2007/08, but tight labour market conditions
will remain a key challenge for many firms, according to a report published
today by TD Economics.
    TD's Deputy Chief Economist and author of the report, Craig Alexander,
states: "The economic backdrop, including solid domestic demand and
historically low interest rates, should be generally supportive for small
business, particularly those serving local markets. And, while export-oriented
firms will face headwinds from U.S. weakness, their fortunes will improve in
    TD Economics expects the Canadian economy to grow by an annual average of
2.4 percent in 2007, and further strengthen to 2.9 percent in 2008. While this
year's pace of expansion is sub-par, it is the result of a "poor handoff"
created by extremely weak economic performance in the fourth quarter of 2006.
    Domestic demand - which encompasses spending and investment by
households, businesses and governments - is expected to experience a robust
3.3 percent increase in 2007/08. This is slower, however, than the
unsustainable 4.7 percent gain experienced in 2006.
    Other positive indicators include the national unemployment rate, which
is forecasted to remain near a 30-year low, and real personal disposable
income (i.e. after inflation and after-tax income), which is expected to rise
by close to two percent annually during the next two years.
    The west will remain the growth leader by a wide margin until
manufacturing conditions improve in central Canada. The latter is likely to
occur when the U.S. economy is on the mend - expected in late 2007 or early
2008. "The gap between regional economic growth rates will narrow as the U.S.
economy firms, commodity prices flatten out and some moderation occurs in the
unsustainable pace of the housing boom and personal spending in the west,"
observed Alexander.
    TD Economics anticipates that interest rates will remain close to current
levels, which is supportive to businesses. Although economic growth has
recently slowed, very little economic slack is being accumulated, implying
that the Bank of Canada is likely to leave short-term interest rates
unchanged. Similarly, longer-term interest rates also appear range bound,
since bond markets have already priced in the near- and mid-term economic
conditions that are in store.
    On the currency front, the Canadian dollar is forecast to remain in a
range of 84 to 89 U.S. cents over the two-year forecast horizon, with a bias
to strength late in the period. This is based on two key factors influencing
the exchange rate: the difference between U.S. and Canadian short-term
interest rates and the direction of commodity prices. Interest rates are not
expected to change materially in either country, and the composite TD
Commodity Price Index is expected to be relatively flat this year, before
rising modestly in 2008.

    Impact on small business

    Given the concentration in services-related and domestically focused
industries, small businesses will largely benefit from robust domestic demand
and will be insulated to the near-term weakness in the export sector.
    Specifically, retailers are likely to experience a softer pace of sales,
but the high employment rate and growth of personal income will keep Canadians
shopping at the malls. The accommodation and food industry will benefit from a
healthy domestic economy, but growth in the sector may be tempered by a strong
Canadian dollar and the new passport requirements for individuals crossing the
U.S./Canada border, which will take effect for ground travel in 2008, both of
which may constrain tourism.
    A decline in housing starts and a cooling in the resale market will
impact the construction and real estate industries, but both will still
produce solid results. Moreover, resale prices are still expected to climb at
a national average rate of approximately five percent, illustrating the
prospects for continued strong demand for real estate services.
    Wholesalers and manufacturers will be greatly affected by their exposure
to international trade, with importers faring well and exporters experiencing
challenges. For example, many small businesses are related to forestry, which
is being hard hit by the on-going housing correction in the United States.
There are other considerations as well. Small and medium-sized businesses
related to the auto industry and with strong ties to the North American Big
Three assemblers will likely continue to face challenging times due to
on-going restructuring in the industry.

    Tight labour markets

    Small businesses will continue to be challenged by tight labour market
conditions. The national unemployment rate will stay at close to a 30-year low
over the forecast horizon and this is likely to put upward pressure on wages.
The situation will be most acute in western Canada. The unemployment rate in
Alberta will remain below four percent, while it is projected to stay below
five percent in British Columbia. However, this is not just a western story.
For example, unemployment in Ontario is forecast to peak at less than seven
percent in 2007, which is still quite low by historical standards.
    "This is not to diminish the labour market difficulties in some sectors,
like manufacturing, but for many other industries the greatest hurdle in
recent years has been finding adequate staff with the necessary skills, and
this appears likely to continue," said Mr. Alexander.
    Other challenges include high input costs and increasing competition from
both domestic and foreign competitors. The good news is that the upside to
material and energy costs is likely limited from current levels, but the bad
news is that they are unlikely to decline significantly over the forecast
horizon. Competition will remain fierce, and that means businesses will need
to be nimble and adaptive. Mr. Alexander goes on to say small businesses
should consider increasing their investments in productivity-enhancing
machinery and equipment to help on this front, given that the Canadian
dollar's strength has reduced the cost of imported capital.
    Moreover, the 2007 Federal Budget allows manufacturers to write-off their
investment in machinery and equipment faster, which lowers the cost of capital
purchases for small businesses in this sector, plus all firms are allowed to
write-off computers more quickly.

    For full details of the forecast, please refer to "Economic Outlook
Remains Supportive to Small Business in Canada" available at

For further information:

For further information: Craig Alexander, Deputy Chief Economist, TD
Bank Financial Group, (416) 982-8064, craig.alexander@td.com

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