Small businesses are expected to lead the Canadian economy into recovery from a difficult 2003, according to a new study from CIBC World Markets.

“The fundamentals which set the stage for renewed small business activity are already in place,” said Benjamin Tal, Senior Economist, CIBC World Markets, in a news release. “Small firms appear to be ready to resume their traditional role as the pioneers of the economic cycle and we expect them to be first out of the gate on the road to recovery.”

With interest rates remaining low and consumers still willing and able to spend, the outlook for 2004 is promising. The study, Canadian Small Business: A Growing Force, indicates that small business activity is projected to expand by 3.5% in 2004, outpacing the economy as a whole. This will represent a significant improvement from a difficult 2003/

“Given that more than half of small firms in Canada cater directly to the consumer market, it is easy to see the link between strong consumer spending and increased small business activity,” said Tal.

Canadian small businesses have shown unprecedented resiliency, outpacing the overall economy during the slowdown of 2001 and being the first to capitalize on the recovery of 2002. This notable strength was due, in large part, to the increased reliance of small business on consumers, who single- handedly kept the economy above water.

Real consumer spending rose by an average annual rate of more than 3% since 2000, providing a significant boost for small businesses in sectors such as retail trade, as well as personal and business services. The study indicates that currently a 1% increase in consumer spending results in an estimated 0.7% increase in small business economic activity – the largest contribution on record. This represents an almost 20% increase over 15 years ago.

As for the impact of the rising loonie, the study notes that one in four small businesses in Canada will be negatively impacted by a stronger dollar, while an estimated 20% will benefit.

“Small businesses indirectly benefit from the higher dollar because it helps keep interest rates low,” said Tal.

A strong dollar is particularly harmful to the 20% of small businesses that export their products to the U.S. market and to those firms that have direct links to larger exporting firms. Small businesses also feel the impact of a stronger dollar with increased competition from cheaper imports.

The tourism industry is another casualty of a strong dollar. With its negative impact on the transportation, accommodation, food and beverage services and other related industries, reduced tourism may cost the economy almost $5 billion over the next year.

The increased purchasing power of a stronger dollar has a positive impact on small businesses that import raw materials and finished goods.

The Canadian dollar has appreciated sharply over the past year. CIBC expects the Canadian dollar to remain relatively strong and to trade around the 75¢ level in the foreseeable future.

Canadian Small Business: A Growing Force, is available on the CIBC World Markets Web site.