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Small businesses more confident (but not enough to invest)

A new report from Bank of Montreal suggests Canada's small-business owners are becoming more optimistic. But there is still scant evidence that they are prepared to back that confidence with money, and their reticence is a significant obstacle on the Bank of Canada's prescribed path for economic recovery.

BMO's twice-yearly Small Business Confidence Index rose to 70, from 59 in the spring and 63 a year ago. The index, derived from a survey of small-business owners, reflects the owners' opinions on a series of questions regarding the prospects for business growth, investment and the broader economy.

Sixty-two per cent said they expect better business conditions in general in 2014, versus only 10 per cent who predict worse conditions. Fifty-five per cent expect their business to grow next year, compared with just six per cent who expect it to shrink.

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Yet when it comes to putting their money where their mouths are, the small entrepreneurs grow reticent. A modest 31 per cent expect to invest more in their business next year, while 12 per cent plan to reduce their investment. And of those who do plan to increase their investments, fewer than half say they intend to hire more staff.

Granted, those investment-intention levels are modestly improved from the previous survey last spring. Nevertheless, they highlight an ongoing problem for the Canadian economy, one that is of considerable interest to the Bank of Canada: The stubborn lack of business investment that has kept the economic recovery stuck in a frustratingly low gear.

Early in the year, a Statscan survey indicated that Canadian businesses intended to increase investments in machinery, equipment and construction by a thin 1.7 per cent in 2013 – which, outside of the 2009 recession, was the smallest increase in 18 years. In the first two quarters of the year, business capital investment was was actually down – a prominent factor in the country's tepid gross domestic product growth.

Small business, specifically, hasn't come anywhere near living up to its fabled reputation as a dynamic, nimble engine of economic activity and job creation. From the first quarter of 2010 (the low point for business employment in Canada) to the end of 2012, Canadian businesses added nearly 1 million jobs – but companies with fewer than 20 employees lost 28,000 jobs. The small-business segment accounts for one-fifth of all Canadian jobs, and it hasn't contributed a single job to the country's recovery.

This is of primary concern to the Bank of Canada, which has said – repeatedly – that it is counting on a revival in business investment to help spur the next stage in Canadian economic growth. In a speech last month, Stephen Poloz, the central bank's rookie boss, talked at some length about the lack of creation of new companies during the economic recovery – something he sees as a vital source for new economic momentum.

"This matters a lot," Mr. Poloz said. "As they grow from one employee, to five, to 20 or more, they generate an outsized proportion of employment – in every economy, not just ours."

Mr. Poloz is encouraged that the numbers, finally, are starting to show a pick-up in business start-ups. Perhaps his optimism reflects some of the same confidence that small-business owners expressed in BMO's survey. But until we start seeing the hopes translate into sustained stronger investment and meaningful job growth, small business will remain a big missing piece in the central bank's recovery puzzle.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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