In a detailed interview with CanadianSME Small Business Magazine, Louise Southall, Economist & Small Business Specialist at Xero, explored the implications of the recent Bank of Canada’s rate cut to 4.75% on small businesses across Canada. Louise emphasized that while the rate cut is a positive signal, its immediate impact on small businesses might be minimal due to the lag between rate changes and their effects on economic activity. However, she noted the potential for an “announcement effect” that could boost consumer confidence and, subsequently, spending. Focusing on sectors like hospitality and personal services, which are sensitive to economic fluctuations, Louise pointed out these areas might see more immediate benefits from increased consumer spending. Despite the uncertainties, she advised small businesses to leverage digital tools and work closely with financial advisors to navigate the changing economic landscape effectively. This strategic approach could help stabilize and potentially grow their operations amidst ongoing economic volatility.
Louise Southall is Xero’s Economist. Louise joined Xero in mid-2020 as part of the Xero Small Business Insights (XSBI) team. The XSBI program uses anonymized and aggregated data from the Xero platform to inform decision-makers about the latest trends in the small business economy in order to support small businesses.
She has almost 30 years of experience in economics and business advocacy working with multiple business organizations, councils, government agencies and charities. Her work has covered a broad range of economic and business-related policy issues, membership projects and thought-leadership research. She has a Masters of Economics from Macquarie University and a Bachelor of Economics (hons) from the University of Newcastle.
As Xero’s Economist, how do you anticipate the Bank of Canada’s recent rate cut to 4.75% will affect the operational and financial strategies of Canada’s small businesses in the near term?
The Bank of Canada’s decision to cut interest rates will be welcome news for many Canadian small businesses, particularly given rates had previously been held at a 22-year high on six consecutive occasions since July 2023. That said, the decision represents a single cut after an extended period of record-high rates, and we know that rate cuts can take between 12 and 18 months to fully flow through to consumers and small businesses. As a result, small businesses may not feel a huge direct impact in the near term.
There are likely to also be positive “announcement effects” from the interest rate cut that may give some businesses a slight bump. Consumers often respond positively to the start of rate-cutting cycles, which is likely to provide a confidence boost to both small businesses and their customers.
Overall, this decision should start to at least ease the squeeze on both household budgets and small businesses and hopefully, it will mean that Canadians will soon have a bit more available to spend in their local businesses.
Following the rate cut, what kind of immediate financial relief can Canadian small businesses expect? Are there particular sectors that might benefit more than others?
As mentioned, many small businesses will not experience an immediate lift following the decision and will need to wait for consumer spending to catch back up in the coming months. However, this rate cut is likely to benefit some sectors more than others.
The decision will be particularly beneficial for small businesses selling discretionary products and services (i.e. non-essentials). These types of businesses tend to be more sensitive to interest rate hikes and will be hoping that customers now have a bit extra to spend in their business. Examples include hospitality businesses, arts and recreation, and personal services such as hairdressers and beauticians.
With the latest XSBI data indicating some struggles but also signs of resilience among Canadian small businesses, how might the recent rate cut shift the economic outlook for these businesses over the next few months?
It’s true that the latest Xero Small Business Insights data showed some stabilization of sales, despite ongoing challenges. Canadian small business sales fell 3.8% year-over-year in the December quarter and have been lower than the same month in the previous year for nine consecutive months (i.e. April 2023 – December 2023). However, the sales decline was less than in previous quarters, a signal that positive growth could be on the horizon.
It’s too early to speculate on how this rate change will impact the overall economic outlook for Canadian small businesses in the future. However, now that the Bank of Canada has kicked off a rate-cutting cycle, we will be keeping a close eye on the impact of this rate cut on future Canadian small business sales data to see if it has an impact on their bottom line. In any case, a cut of any size is likely to have a direct positive impact on small businesses as it relates to their own borrowing costs, which will be encouraging for many companies.
Considering the fluctuating economic conditions and recent monetary policy changes, what strategic advice would you offer to small business owners to help them stabilize and grow their operations?
Changing interest rates and shifts in national monetary policies are out of the control of most small business owners. However, what small business owners can control are their own operations and the resources they’re using to attract and interact with customers.
When cash flows are tight, small businesses should take every opportunity to encourage faster payment times from their customers. This could look like including additional accepted payment methods or easy-to-use payment systems that work in tandem with invoicing software. When consumer spending is low, tactics that get more customers through the door, like loyalty programs or special discounts, can also help boost short-term revenue and customer loyalty.
What long-term financial planning strategies should Canadian small businesses consider to safeguard against similar economic fluctuations in the future?
When dealing with an unstable market with shifting conditions as a small business owner, we always recommend working with an accredited accountant or bookkeeping professional who can review your business’s financial data and provide an expert recommendation based on your particular case in real-time. A savvy accountant can give you strategic advice tailored to your specific business needs and the current market conditions, and help identify opportunities to save money or boost revenue. They can also help introduce digital accounting and tax tools, so you have full visibility of your books at all times and can help remove or automate administrative tasks that distract you from your core business.
