Contrary to what some Americans may think, the costs of tariffs are offloaded to the consumer. So it comes as no surprise that early outlook on Canada’s second quarter is seeing its economy put in somewhat of a rough patch. The latest Main Street Quarterly report by the Canadian Federation of Independent Business (CFIB) is predicting muted growth and significant contraction in Q2.
“Given how the long-term business confidence is at historically low levels, it’s not surprising that small businesses are pausing their capital expenditures. It’s nearly impossible for owners to plan expansions or investments when they’re not sure if their business will even be open in six months,” Simon Gaudreault, CFIB’s chief economist and vice-president of research, said in a statement.
“Governments at all levels urgently need to balance the economic environment, so SMEs have the capacity to withstand the impacts of the trade war.”
A bumpy road ahead
According to estimates and forecasts from CFIB in collaboration with AppEco, the Canadian economy experienced modest growth of 0.8% in the first quarter of the year. However, that early progress is expected to reverse sharply, with a significant economic contraction anticipated in the second quarter. Inflation, as measured by the total Consumer Price Index, climbed to 2.4% in Q1 and is projected to rise further to 2.7% year-over-year in Q2.
Despite encouraging signs of recovery toward the end of 2024, private investment has taken a sharp turn downward, dropping by 13.9% in Q1. Even more concerning, forecasts for Q2 predict a steeper decline of 19.1%.
Meanwhile, the private sector job vacancy rate remained unchanged at 2.8% in the first quarter, reflecting 393,400 positions that continue to go unfilled.
Sectoral pressures
Manufacturing and wholesale firms are being hit the hardest by sluggish demand, a consequence of their greater exposure to international trade. In contrast, businesses in sectors such as agriculture, hospitality, arts, recreation and information are struggling in a different way — they’re less able to pass rising costs on to consumers and are instead absorbing much of the burden themselves.
The impact on pricing strategies is already visible. One-third of wholesale firms have raised their prices in response to cost pressures, while two-thirds of businesses in the hospitality and construction sectors say they plan to increase prices once supplier costs begin to stabilize.
“Small businesses are feeling the pinch. The raging trade war will likely drive up the costs of doing business and lead to inflation,” said Simon Gaudreault, CFIB’s chief economist. “While the Bank of Canada maintained its key interest rate, it will take bold policy changes for small businesses to feel meaningful relief.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
