Economic growth fuels business confidence and investment intentions in Canada

Higher-than-expected economic growth in 2017 will fuel Canadian business confidence in 2018, leading to a jump in planned investments by small and mid-sized enterprises (SMEs), says a new study.

The study from the Business Development Bank of Canada finds small and medium-sized enterprises plan to make $140.5 billion in investments this year, a 3% increase over 2017, mainly to support their growth.

The upswing is due largely to a surge in business acquisition plans, a long-expected trend driven by Canada’s aging population and the retirement of baby boomer entrepreneurs.

Business owners expect to spend 79 per cent more on acquiring other businesses in 2018, or $18.9 billion, up from $10.6 billion in 2017.

“The findings are very encouraging because SME investment is critical to Canada’s economic health. These businesses make up 99.7 per cent of all Canadian companies. When they invest, they become more productive and competitive and can offer higher wages and benefits,” said Pierre Cléroux, VP, research and chief economist at BDC.

By region, British Columbia and the territories (17 per cent planned investment increase), Alberta (up 12 per cent) and Quebec (up 11 per cent) have the brightest investment outlooks, while Ontario businesses expect to trim investments by 1 per cent in 2018 and other regions anticipate steeper drops.

According to the study, the lack of qualified personnel is the leading obstacle to making investments, with chronic labour shortages especially pronounced in rural Quebec and Nova Scotia.

However, spending on research and development and employee training will rise by a total of $2.4 billion this year, reflecting a long-term shift in the way Canadian businesses invest.

These investments have increased every year since BDC began conducting its survey on investment intentions in 2015.

The findings are supported by Statistics Canada research that shows investment in intangible assets such as intellectual property, R&D or employee training has increased at a faster pace than investment in equipment and building over the last 30 years.

Lack of funds generated by the business and risks associated with investment projects are other leading reasons for not investing.

The BDC study also found:

  • Sustaining growth was the top-cited reason for investing in 2018, followed by boosting the value of the business and keeping pace with the competition.
  • Among sectors, technology (up 8 per cent) and services (up 7 per cent) show the highest growth in investment intentions, while manufacturing is flat and a decline is expected in the construction and resources sector (down 14 per cent).
  • Nearly half of mid-sized businesses (those with 100 to 499 employees) plan to invest to increase automation in operations, while only a quarter of businesses with less than 100 workers plan to do so.
  • Businesses that invest more expect higher sales growth. Of SMEs that forecast revenue growth of 20 per cent or higher in 2018, 85 per cent plan to invest.

BDC’s third annual study of SME investment intentions is based on a survey conducted last August and September by the research firm SOM. In total, 4,019 business owners participated.