Adrienne Warren is a Senior Economist at Scotiabank; Aron Gampel is vice-president with Scotiabank Economics.
It's long been said that small business is the backbone of Canada's economy. Almost 40 per cent of employed Canadians work for or run companies with fewer than 100 employees – the highest number in a decade. Many more are self-employed.
This week, the Scotiabank Global Economics Special Report on Small Business reveals that small businesses are making a meaningful impact on the economy. In fact, the report suggests that in many ways it's the small business sector that's been cushioning the labour market slowdown in this country.
While small businesses may not be leapfrogging their larger counterparts in every aspect, there are a few standout findings that might be a bit of a surprise.
For one, small businesses are outpacing large organizations in terms of annual payroll growth. The report shows that between 2010 and 2015 small businesses averaged a 1.4 per cent increase in payroll growth versus a 0.9 per cent increase among firms with more than 500 employees.
On top of that, small businesses are creating more net new jobs than large companies. Between the post-recession years of 2010 and 2015, small businesses created more than half a million net new jobs, accounting for 45 per cent of national payroll gains. This statistic is particularly interesting because it marks a true shift in the Canadian job market. From 2002 through 2008, large businesses dominated hiring.
What's driving this transformation for Canada's small businesses? Much of it comes down to what they're doing and where they're based.
Small business dominates service-based industries
One factor is the shift in Canada's industrial performance. Companies that require large infrastructures to operate – such as mining, oil and gas, and manufacturing – are no longer the powerhouse industries they once were. The mining and oil and gas sectors have faced steep job losses since 2015. Manufacturing payrolls have flat-lined since 2010 largely due to weak global demand.
However, sectors that are labour-intensive and dominated by small-sized firms are on the upswing. Construction payrolls increased at a 3.4 per cent annual rate from 2010 to 2015, partly due to Canada's hot residential and commercial building markets. Similarly, accommodation and food-services payrolls have increased at a 2.4 per cent yearly rate thanks to Canada's weaker dollar, which is simultaneously attracting foreign visitors and keeping Canadians vacationing locally.
Small businesses are also expanding in professional, scientific and technical services, such as accounting, legal, IT design, consulting, advertising and public relations, which saw a bump in payrolls of 2.1 per cent annually between 2010 and 2015. And, with a third of Canada's healthcare and social assistance providers being small businesses, physicians, dentists, optometrists, chiropractors and home-care professionals are all well positioned as Canada's population continues to age.
For the short term, this is all great news for Canadian small business owners. But as the pendulum shifts back toward a revival in manufacturing activity and as many of the depressed resource sectors begin to revive, small business owners need to consider how to take advantage of improving export opportunities.
It's time for small businesses to extend their reach
The report shows that the vast majority of small businesses in Canada focus their sales efforts on their own local region. Roughly half will expand within their own province, but when it comes to extending their reach to other provinces or other countries, the numbers drop significantly.
Thinking beyond provincial borders is critical for small business owners in some parts of the country. The report demonstrates much of the strength in the Canadian economy is concentrated in British Columbia and Ontario, regions that have proven to be resilient because of their diverse economic base, with job gains running the gamut of business and professional services, health, education and government services, real estate and housing, technology and media, transportation, and tourism. Progress towards reducing interprovincial barriers to trade would go a long way towards bolstering stronger small business activity from a national perspective.
What's next? With our weak dollar, Canadian small businesses have the opportunity to take advantage of comparatively stronger domestic economic performances in the United States and other international markets, where consumers are spending again in the aftermath of the financial crisis. Currently, only a quarter of Canadian exports to the U.S. come from small and medium-sized businesses.
Canadian small businesses will continue to face challenging economic and operational conditions in a sluggish global environment. However, they have proven their resilience and ability to adapt in the past, and have the potential to take advantage of improving export opportunities going forward.