Interest rate cuts haven’t helped Canadian small business—yet

The start of 2024 looked like a turning point for Canadian small businesses. 

In the first three months of the year, small businesses were doing notably better across three core metrics—sales growth, late payments, and time to be paid. The Bank of Canada had decided to start cutting interest rates in June, and it wasn’t unreasonable to expect a potential boost to consumer spending. Expectations for an economic rebound were growing. 

“When more businesses adopt emerging technologies, the economic benefits multiply across the economy.”

But as we approach the end of the year, the latest data from Xero Small Business Insights (XSBI) shows disappointing metrics for Canada’s small business sector, defined as companies that have between one and 99 employees.

Those companies, which include many Canadian startups, experienced a 3.7 percent year-over-year sales decline in the first part of the year.

And despite the early optimism, Canadian small businesses have yet to feel the lift that they hoped lower inflation and rate cuts would deliver.

Rate cut impact—or lack thereof

It is not unusual for the impact of interest rate cuts to take up to 18 months to fully flow through the economy. 

However, what’s concerning is the lack of a short-term “announcement effect” that would have boosted consumer spending in small businesses. 

In fact, according to the new XSBI quarterly data, the opposite is happening. 

Consumer spending didn’t surge—it’s still lower than a year ago. The delayed effects of the rate cut, paired with consumer caution, mean the immediate benefits small businesses hoped for have yet to materialize at all.

September’s CFIB Monthly Business Barometer shows similar trends. The Small Business Confidence Index dropped from 56.6 points in May—before the rate cuts started—to 55.0 in September. The short-term optimism index also dropped almost two points. Small businesses still aren’t feeling the benefits of the rate cuts rolled out by Bank of Canada Governor Tiff Macklem. 

Canada as a global outlier

Is this soft sales performance unique to Canada?

Small businesses around the world are still addressing post-pandemic realities, but their challenges don’t seem as severe as the situation facing Canadian businesses. 

For instance, in the United States, the small business sector experienced a sales decline of only 0.9 percent in the same period (April to June) that Canadian sales dropped by 3.7 percent. Canada also underperformed other major economies, like the United Kingdom and Australia.

This is all despite some positive shifts in other metrics. For example, late payment times in Canada have continued to improve. Businesses are now waiting 6.3 days on average for overdue payments, compared to 7.6 days in the previous quarter.  

The disconnect may be, at least in part, due to Canada’s high unemployment rate. 

While other major economies have managed to avoid significant job losses, while controlling inflation with interest rate rises, Canada’s unemployment rate has risen to over six percent. Insecure job prospects discourage consumers from spending, which impacts small businesses that rely on local, consistent patronage. 

This factor, coupled with ongoing cost of living pressures, means Canadian consumers are holding back—creating challenges for the small business sector.

Small businesses have little control over macro-factors that negatively impact the broader economy (and have an outsized impact on their success). They need to be able to respond to them as best they can, building resilience into their systems and processes while they await higher spending trends.

Resilience through digitization

There’s no telling how long it will take for the impact of increasingly lower interest rates to flow through to consumer spending at small businesses. But waiting around isn’t an option. 

What small business leaders can do is improve their resilience by taking steps to increase productivity. This can include: 

• Choosing tools and technologies that introduce efficiencies into your systems.
• Reviewing your systems and adopting smarter methods and workflows.
• Investing in talent by hiring and upskilling team members.
• Harnessing your inner entrepreneur to scale your business, rethink supply chains, and foster a spirit of innovation in your business. 

Small business owners also need to strategically shift how they leverage and use technology. Technology use is a key driver of productivity growth. And improving productivity is a great way to secure the long term success of your business. 

Data from Xero’s 2023 state of the industry report shows that many accounting businesses (70 percent) are experiencing revenue growth. A notable 40 percent of these practices attribute this growth directly to their use of cloud-based software. This suggests that while macro conditions may pose barriers, individual businesses can still find paths to growth through operational innovation.

Policymakers, too, have a critical role to play in making the technology transition easier by crafting policies that prioritize the needs of small business owners. This will allow Canadian small businesses to accelerate their ability to bounce back faster, ensuring they’re ready for the next phase of economic recovery. 

Government policies can enable, rather than hinder, technology adoption among small businesses. For instance, initiatives like open banking—dubbed “consumer-driven banking” in Budget 2024—offer a promising path forward. By allowing small businesses to share their financial data more freely and shop around for better financial products, open banking could help improve cash flow and reduce operational stress.

A simple truth: When more businesses adopt emerging technologies, the economic benefits multiply across the economy. 

In other words, fostering a digital-first approach across industries may be the key to helping Canada’s small business sector finally rebound.

Ben Richmond is Managing Director, North America at Xero.

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View the latest data in the Xero Small Business Insights report.

Feature image courtesy Unsplash. Photo by Jason Goodman.