Small Business Optimism Drops Significantly

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Insurance costs, SARS and Mad Cow take toll

July, 2003 – Halifax – The results of the quarterly survey of small and medium-sized firms by the Canadian Federation of Independent Business (CFIB) show that business confidence in the economy took a heavy hit in the second quarter of 2003. According to the survey findings, soaring insurance costs, SARS and Mad Cow disease (BSE) have taken a toll.

As a result, the CFIB Quarterly Business Barometer decreased to 104.8 in June from 108.8 this past March. The report is being distributed today to all provincial Finance Ministers who are currently meeting in Halifax.

Despite this, a still strong 45 per cent of small business owners said they expect to be performing much stronger or somewhat stronger 12 months from now, while almost a fifth, 18 per cent, expect to be worse off. The remaining 37 per cent see things remaining much the same. These results are slightly less positive than from the previous survey three months ago. As a result, the CFIB Quarterly Business Barometer Index decreased to 104.8 in June, from 108.8 in March (1988=100).

Among the major shocks to the business climate, insurance generated by far the most concern for small and medium-sized businesses. About 34 per cent of business owners say they are being significantly harmed by either the high cost of insurance, or the elimination of coverage altogether by insurance companies, while another 41 per cent say they are slightly harmed by the rapidly rising costs of insurance. “The long-running issue of insurance is causing the most harm to small firms and having the greatest business impact,” said CFIB chief economist, Ted Mallett. “Keep in mind that in addition to auto insurance premiums, there is significant damage being done on other types of business property and casualty insurance, including property, liability and business interruption,” he said.

Interestingly, Mallett said strained relations in the aftermath of the Iraq conflict continue to impact the economy; many business owners say their sales to US customers still suffer. About 8 per cent of owners say they are being significantly harmed, while another 24 per cent say they are slightly harmed. Similar numbers of businesses continue to be affected by the ongoing softwood lumber dispute, although the impacts are far more concentrated in British Columbia, Northern Ontario, Quebec and New Brunswick. Eleven per cent of business owners report they are being significantly harmed, while an additional 18 per cent say they are slightly harmed.

Mallett pointed out Mad Cow disease and SARS have also bruised business confidence, particularly on a regional basis. For example, western provinces are bearing the brunt of the effects of concerns over Mad Cow disease. Businesses in Alberta (51 per cent), Saskatchewan (51 per cent) and Manitoba (38 per cent) say they are being significantly or slightly harmed by BSE. In Ontario, Mallett said small firms (31 per cent) are significantly or slightly being harmed by SARS with the most severe impact being felt in the Toronto region where half of business owners say they are affected. Fisheries closures are the most harmful external shock to Atlantic Canada’s firms. Fisheries closures have proved significantly or slightly harmful to businesses in Newfoundland and Labrador (76 per cent), Prince-Edward-Island (57 per cent), Nova-Scotia (35 per cent) and New Brunswick (30 per cent).

Nationwide, 7 per cent of business owners say they are being significantly harmed by BSE and another 16 per cent are slightly harmed. The overall impact of SARS is about as significant, with 5 per cent of firms being significantly harmed by SARS and another 16 per cent slightly affected.

“Not surprisingly, the combined assault of these external factors has been hard on business confidence, particularly in the short-term,” said Mallett. He said short-term expectations have deteriorated, with 37 per cent of business owners saying their firm’s performance will be much weaker or somewhat weaker in the next three to 12 months. Mallett also said 30 percent of small business owners say their firms are doing worse than 12 months ago, but pointed out that this is the same as how owners responded in March.

The future employment picture among small businesses appears to have slipped slightly since March. Overall, 25 per cent of businesses plan to increase their full-time employment levels in the next 12 months, while 10 per cent plan to reduce them. Very little change in part-time employment is expected, with only 11 per cent of firms looking to increase employment levels and 8 per cent expecting a reduction. Both employment indicators are down slightly.

Across all industry sectors, the index fell substantially between March and June 2003. The Quarterly Business Barometer shows that the agriculture, construction, retail and hospitality sectors are feeling pinched the most, while business, social and financial services are the least affected by weakness.

The survey was conducted between June 2 and June 13 of this year, and drew 3,070 respondents. The national results are accurate to within +/- 1.8 percentage points 19 times out of 20.

Full report is at http://www.cfib.ca/research/reports/qbb_06_03_e.pdf