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Drop in small business optimism shows economic slowdown may be underway: CFIB

After a seven-month upward streak, the small business optimism index for the next 12 months dropped 2.1 points, sitting at 54.1 in June, according to the latest Canadian Federation of Independent Business (CFIB) Business Barometer®.

Atlantic Canada is doing relatively better than the rest of the country in June due to the start of the summer tourism season, with all four provinces reporting long-term confidence indexes above 60.

As for the sectors, retail posted the biggest decrease in long-term optimism (-10.8 index points to 44.3), remaining at the bottom of the optimism scale, while information and recreation (69.1) topped the sector rankings.

“National small-business optimism as measured through our index remains far below its historical average of 61. Meanwhile, other results from our tracking survey point to early signs of an economic slowdown,” said Simon Gaudreault, Chief Economist and Vice-President of Research at CFIB. “Price, labour and demand indicators all show results consistent with an economy that is losing some of its steam.”

The Consumer Price Index dropped to 3.4% in May, the lowest it’s been since June 2021. The Barometer also shows the pressure on average wage and price plans was less intense in June. The average price plans had one of the largest decreases this year, reaching 3.3%. Small businesses expect to increase wages by an average of 2.9% over the next 12 months. While still fairly high, both plans are on a clear downward trend since they peaked at this time last year.

This month’s Business Barometer suggests the labour market is somewhat cooling, with 45% of businesses reporting that shortages of skilled workers are slowing them down, the lowest share in close to two years. For semi- or unskilled workers, the situation is more stable, with 34% of firms signalling shortages stump their progress. Fewer employers (18%) were looking to hire in the next three months, compared to May (22%) or the same time last year (23%).

“The demand for labour is usually stronger this time of year. Small business owners may be adjusting to labour shortages or cutting down on hiring, choosing instead to work more hours themselves or reduce their services. Immigration is also through the roof, meaning there’s an influx of candidates on the market. While they may not be immediately hired, it should ultimately help employers find qualified staff,” said Andreea Bourgeois, CFIB Director of Economics.

The share of businesses reporting insufficient domestic demand reached 32%, a high point in two years. It is on a clear upward trend since reaching a low point of 21% in June 2022, and it is getting close to its historical share of 36%. Results for the unfilled orders indicator also seem to be normalizing and gradually more firms are reporting unsold inventories.

“While one month does not make a trend and we still have a long way to go, several signs tell us we may finally be seeing some cooling of the economy,” Gaudreault concluded.