Despite Canada’s booming economy amid easing pandemic restrictions, recovery for the country’s small and medium-sized businesses has lagged their bigger counterparts, a new Scotiabank Economics report says.

This could be in part due to a slower rebound in sectors such as accommodation and food services, which were the hardest hit by COVID-19 and where gross domestic product (GDP) has yet to catch up to pre-pandemic levels, wrote Nikita Perevalov, Scotiabank Economics’ Director of Economic Forecasting.

Plus, small and medium-sized enterprises don’t have the economies of scale that help bigger firms compete for labour and supplies as shortages of both linger. However, smaller businesses that use local supply chains also have advantages, he notes.

“As the post-pandemic process of de-globalization gathers pace, large firms that are more likely to rely on complicated global supply chains may find themselves under pressure as supplies become unreliable and costs rise. In this environment, smaller firms may benefit from a less complicated production setup and the growing move towards reshoring,” Perevalov wrote.

Meanwhile, businesses of all sizes are struggling with a lack of workers and supply shortages, despite strong demand. The report cites a recent survey by the Canadian Federation of Independent Businesses (CFIB) that shows that a large share of SMEs see the labour shortage as a constraint on revenue growth. However, there is a notable shift as the demand for lower-skilled workers increased during the 2020-2021 labour market recovery, Perevalov said.

“This is in contrast to the developments before the pandemic, when the share of high-skilled jobs rose significantly due to technological change encouraging jobs up-skilling.”

Looking ahead, although SMEs will continue to see pressure from rising costs and labour shortages, aggregate demand in 2022 is expected to be strong, particularly for those sectors that are still recovering.

As well, supply disruptions are expected to slowly ease over 2022 and 2023. However, the Bank of Canada is expected to raise its key policy rate further over the next year or so, making the cost of borrowing more expensive.

“This could mean that SMEs, who already see a lack of financial resources as one of the factors constraining further business development and the adoption of new technology, should now use the opportunity to secure required capital in advance of further rate hikes,” Perevalov says.

Click to read the full Scotiabank Economics’ SME trends report.