The Canadian economy is grappling with a challenging outlook as trade disruptions and rising costs put significant pressure on small and medium-sized enterprises (SMEs). According to a recent report by the Canadian Federation of Independent Business (CFIB), in partnership with AppEco, Canada's economy experienced only slight growth in the first quarter of 2025, with expectations of a substantial downturn in the following quarter.
Key Highlights from CFIB’s Q1 2025 Report
CFIB’s latest Main Street Quarterly report presents a cautious economic forecast. Canada’s GDP grew by just 0.8% in Q1 2025, but the economy is expected to contract sharply in Q2. Inflation, as measured by the Consumer Price Index (CPI), rose to 2.4% in Q1 and is predicted to further increase to 2.7% in the next quarter, placing further strain on both businesses and consumers.
Private investment, which had begun to recover towards the end of 2024, saw a significant drop of 13.9% in Q1 2025. The outlook for Q2 is even worse, with a forecasted decline of 19.1%. This decline is particularly concerning for SMEs, which are already facing rising input costs and weak demand.
Impact on SMEs: Struggling with Rising Costs and Declining Demand
The report sheds light on the difficulties faced by SMEs, particularly in industries that are heavily exposed to trade. Exporters, in particular, are bearing the brunt of tariff-related costs, with limited ability to pass these increases onto consumers. Conversely, importers have more flexibility to adjust their prices to account for rising costs.
Manufacturing and wholesale firms are the hardest hit, as their business models are closely tied to global trade, and they are seeing a sharp decline in demand. Meanwhile, sectors such as agriculture, hospitality, and the arts are also feeling the pinch, though they are less likely to pass on additional costs to consumers and are instead absorbing them.
In response to rising costs, one-third of wholesale firms have already increased their prices. Additionally, two-thirds of businesses in the hospitality and construction industries are planning price hikes once their supplier costs stabilize.
Economic Strain and Long-Term Outlook
According to Simon Gaudreault, CFIB’s Chief Economist and Vice President of Research, the ongoing trade conflict and its economic ripple effects are deeply affecting small businesses. “Small businesses are feeling the pinch,” Gaudreault said. “The raging trade war will likely drive up the costs of doing business and lead to inflation. While the Bank of Canada maintained its key interest rate, it will take bold policy changes for small businesses to feel meaningful relief. That would include reducing taxes and adopting full mutual recognition of each other’s rules, permits, and regulatory regimes.”
The report also highlights the ongoing decline in long-term business confidence, which is currently at historically low levels. Many small business owners are pausing their capital expenditures, uncertain about the future. “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,” Gaudreault added.
Call for Immediate Action
The CFIB concludes with a strong call for action, urging governments at all levels to address the economic challenges faced by SMEs. The federation emphasizes the need for measures such as tax reductions and greater regulatory alignment between trading partners to help businesses weather the ongoing trade tensions and the rising cost of doing business.
As trade disruptions continue to reverberate through the Canadian economy, it is clear that policymakers must act quickly to create a more stable environment for small businesses, enabling them to navigate these difficult times and plan for a more prosperous future.
