Investment Intentions of Canadian Entrepreneurs: An Outlook for 2020

Entrepreneurs’ confidence in the world economy is eroding

The fall survey suggests that small and medium-sized business owners will start the year less confident than they were in 2019. The balance of opinion on global and U.S. economic conditions for the next 12 months has moved down and is far below zero, suggesting that business confidence has deteriorated compared to last quarter. Confidence in the Canadian and provincial economies remains low, but stable, compared to the previous quarter.

How to read figures in this report

Investment intention in training

Balance of opinion: % expecting higher spending – % expecting lower spending

For most survey questions, we report the following information:

1. intention variable (confidence, investment intention or outlook)
2. balance of opinion for the current quarter
3. change in percentage points compared to the last quarter
4. the balance of opinion for the previous quarter

A percentage point is the difference between two percentages. For example, moving up from 10% to 15% is a 5 percentage-point increase.

How to read: The balance of opinion on entrepreneur investment intentions for employee training over the next 12 months rose by 2 percentage points to reach +8 this quarter, compared to +6 in the previous quarter.

Interpretation: The proportion of businesses planning to spend more is higher than that of businesses planning to reduce spending, which suggests investment in this category is expected to rise slightly in Canada over the next 12 months.

• A positive balance moving up indicates spending is rising.
• A positive balance moving down indicates spending is slowing.
• A negative balance moving up indicates spending is recovering.
• A negative balance moving down indicates spending is falling.

Business confidence is declining

Balance of opinion: % reporting better economic condition—% reporting worse economic conditions

Survey question: When you think about the next 12 months, how confident are you about the economic conditions in your province, Canada, the United States and the world, overall?

This lack of confidence reflects business owners’ concerns about the global economy, with a significant increase in the proportion of respondents who believe conditions will worsen in 2020. (See Macroeconomic context.)

As for the provinces, business owners in the Prairies are among the most pessimistic, while the mood is improving in British Columbia and the North. Business owners in Quebec remain the most optimistic in Canada, with a largely positive balance of opinion compared to entrepreneurs in other provinces.

Confidence rising among exporters

Exporters stand out among entrepreneurs, with their confidence about the economy moving up in all regions. Canadian exports have been resilient to trade tensions so far, with merchandise shipments growing 1.4% from January to October 2019, compared to the same period last year.

Entrepreneurs remain optimistic about their own businesses

The business outlook of Canadian entrepreneurs remains steady, despite low confidence in the economy as a whole. The balance of opinion on future sales has moved up to +35, suggesting that many business owners expect money will continue to flow in over the next 12 months. In addition, business owners plan to hire more workers to meet demand in the coming year. Hiring intentions are particularly strong in Quebec.

While the overall results may appear to be encouraging, the historical average of the balance of opinion on future sales in other studies is typically about 50%. Therefore, our survey results suggest that entrepreneurs are not in a buoyant mood.

The story is different in the Prairies. The fall survey indicates that momentum is slowing in the region amid economic struggles that are weighing on business confidence. The balance of opinion on future sales in the region declined five points to +22 in the fourth quarter, from +27 in the previous quarter.

Business and hiring outlooks are improving

Balance of opinion: % expecting sales or headcount to increase—% expecting sales or headcount to decrease

Survey questions: Over the next 12 months, do you expect your company’s total sales or revenue to increase, remain the same or decrease compared to the last 12 months? Over the next 12 months, do you expect the number of employees in your company to increase, remain the same or decrease compared to the last 12 months?

Capacity pressure is increasing

Businesses are experiencing slightly more capacity constraints than they did last quarter. A larger proportion of businesses reported being at or near full capacity. However, the proportion reporting significant difficulties decreased by 1 percentage point.

Capacity constraint can have a disastrous impact on a company’s growth prospects. A study published by BDC in 2018 showed that difficulty in hiring new workers resulted in unfilled orders, declining competitiveness, and deteriorating product and service quality.

More capacity pressure felt by Canadian SMEs

% of businesses facing some or significant capacity pressure

How would you assess your company’s current ability to meet an unexpected increase in demand or sales?

Small business investment plans are up slightly

Despite lower confidence in the world economy, many Canadian entrepreneurs will continue to invest in their business over the next 12 months. The indicator for overall investment spending by small and medium-sized businesses suggests a slight increase in investment intentions over the next 12 months. The indicator rose by 2 percentage points last quarter, from +1 to +3. With the balance of opinion very close to zero, we expect investment spending to remain soft for the first half of 2020.

The slight increase in investment intentions was concentrated in Quebec and Ontario, and was almost exclusively attributable to exporters. (See Investment intentions by region, size, export status and sector.)

Investment spending should increase slightly over the next 12 months

Balance of opinion: % expecting higher spending—% expecting lower spending

The results presented in the figure are the weighted average of the balances of opinion for each asset category.

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Factors driving and constraining investment

Our survey indicates that strong demand for goods and services will support investment over the next 12 months. However, investment will be constrained by a lack of capital, the cost of raw materials or inputs, and high economic uncertainty.

Top factors boosting investment spending

• 51% said strong demand for their products and services.
• 34% said they need to upgrade their technology.
• 23% said they want to build on the momentum from investments made last year.

Top factors limiting investment spending

• 44% said they lack money to invest, either because they don’t have the funds or because their cash flow is low.
• 43% believe the cost of raw materials or inputs will limit the profitability of investments over the next 12 months.
• 40% of business owners say the economic context is unfavourable for investment spending.

Spending on intangible assets expected to outpace spending on tangible assets

Over the next 12 months, Canadian business owners plan to spend more on intangible assets—such as technology, marketing initiatives, training and intellectual property—with the largest increase being for marketing initiatives. However, those plans are offset by lower spending intentions for tangible assets.

The survey results suggest that a multi-year shift in investment spending from tangible to intangible assets will likely continue in 2020. BDC identified this long-term trend in previous studies. It’s in line with a shift toward a services economy and the digitization of businesses.

Investment intentions for intangible assets

Balance of opinion: % expecting higher spending—% expecting lower spending

Technology includes spending on software, databases, IT networks and websites. Marketing initiatives include spending on advertising, branding and marketing. Intellectual property includes spending on intellectual property protection and on research and development.

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Investment intentions for tangible assets

Balance of opinion: % expecting higher spending—% expecting lower spending

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Business acquisitions on the rise

Another form of business investment is the purchase of another company. The fall survey indicates that business acquisitions, where the deal has already been signed, were up 1 percent from last quarter. The proportion of entrepreneurs who plan to buy a business but have not yet signed an agreement was 3 percent higher.

Business acquisitions increasing

% of business owners planning to buy a business

Survey question: Do you plan to acquire another business over the next 12 months?

Ontario leads investment intentions

Investment intentions rose in Ontario and Quebec but declined in the western provinces. In the Atlantic region, the indicator remains slightly positive, but shows signs of weakness. Compared to last quarter, overall spending intentions progressed the most in Ontario, while the largest decline came in the Prairies and in British Columbia and the North, where the indicators entered negative territory.

Investment intentions by region

Balance of opinion: % expecting higher spending—% expecting lower spending

The results presented in the figure are the weighted average of the balances of opinion for each asset category.

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Larger businesses drive spending intentions in Canada

Overall investment spending is on the rise among smaller and larger companies, while it’s slowing down for medium-sized businesses. Larger businesses plan to boost investment spending on all types of assets over the next 12 months (especially on machinery and equipment, technology, and marketing initiatives). Investment intentions are rising for smaller businesses, but are moderated by low confidence in the economy. For medium-sized businesses, the slowdown in their intentions is due to lower planned spending on machinery and equipment, technology and intellectual property.

Investment intentions by business size

Balance of opinion: % expecting higher spending—% expecting lower spending

Small businesses earn less than $2 million in revenue per year, medium-sized businesses earn between $2 million and $10 million per year, and large businesses earn $10 million or more per year.

The results presented in the figure are the weighted average of the balances of opinion for each asset category.

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Investment plans are booming for exporters

The rise in expected investment spending over the next 12 months is almost exclusively attributable to exporters. The indicator for overall investment spending is up sharply from the previous quarter, as exporters plan to invest in both tangible and intangible assets to meet demand. By comparison, spending intentions are sluggish among entrepreneurs who focus solely on the domestic market.

What explains the momentum for exporters’ investment spending? On one hand, they’re much more optimistic about the outlook for the U.S. and global economies. On the other hand, exporters face higher capacity constraints than domestic businesses. In fact, 56% of exporters are reporting some difficulties meeting an unexpected increase in demand, compared to 46% for domestic businesses.

Investment intentions by export status

Balance of opinion: % expecting higher spending—% expecting lower spending

The results presented in the figure are the weighted average of the balances of opinion for each asset category.

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Manufacturing companies lead investment intentions

Overall investment spending should increase in the manufacturing and services sectors, but slow down in the technology sector. Businesses in the resource sector and retail and wholesale trade sector expect to scale back spending. As for businesses in construction, investment intentions have recovered slightly from last quarter, but the indicator remains negative and very close to zero.

Investment intentions by sector

Balance of opinion: % expecting higher spending—% expecting lower spending

The results presented in the figure are the weighted average of the balances of opinion for each asset category.

Survey question: Over the next 12 months, what do you expect your company’s investment spending to be for each of the following categories?

Uncertainty limits investment despite sustained customer demand

• Although demand for SME products and services remains strong and hiring intentions are positive, high uncertainty and slowing global growth are undermining entrepreneurs’ confidence.
• As a result, investment intentions should increase moderately over the next year, fuelled by high demand and technology needs. Lack of capital, the cost of raw materials and inputs, and economic uncertainty are the main barriers to investment.
• The increase in investment intentions for the next 12 months is almost exclusively attributable to exporters. Their investment plans have surged compared to last quarter, while they are sluggish for domestic business owners.
• Investment intentions are strongest in Quebec and Ontario, but show signs of weakness elsewhere.
• The multi-year shift in investment patterns from tangible to intangible assets continues.

Survey on investment intentions of small and mid-sized businesses

The Canadian investment intentions study was revamped in 2019 to make it more frequent, useful, flexible and coherent. BDC developed a new quarterly, web-based survey to collect entrepreneurs’ views on the economy and their investment intentions, first administered in the summer of 2019. Consequently, the results of this study cannot be compared with those of previous editions.

Since July 2019, Delvinia conducts a quarterly online survey of approximately 1,000 business owners and decision-makers on its AskingCanadians panel.

To ensure enough data are collected at the regional level, by sector and by business size, the Atlantic region, the manufacturing sector, and the medium-sized and large businesses segments were oversampled. The results were weighted by region, sector and size of business to ensure findings were representative of Canadian small and medium-sized businesses. Excluded from the sample were self-employed workers, companies with 500 or more employees, and those operating in the utility, education, health care, social assistance and public administration sectors.

Online surveys cannot have a margin of error since they are not probabilistic. For comparison purposes, a probability sample of this size would carry a margin of error of ±3.1 percent points, 19 times out of 20.

Date of surveys

Summer 2019: July 12 to July 22, 2019. A total of 1,022 business owners completed the survey.

Fall 2019: October 1 to October 17, 2019. A total of 1,000 business owners completed the survey.

Caution regarding forward-looking statements

This report contains forward-looking statements about future events. In this context, the forward-looking statements pertain to our forecasts of the future business and financial performance of small and medium-sized Canadian businesses. These statements contain terms such as “want,” “expect,” “intend,” “plan,” “believe,” “could,” “should” and “would.” By their very nature, forward-looking statements cover topics that can, to varying degrees, be uncertain.

Various risks and uncertainties could substantially change the results presented in this report. Those risks include, without being limited to, the performance of industries and firms, the impact of a change in regulation or policy, and the performance of the national or international economy. They also include any other regional, national or international changes, including changes of a political or economic nature, or changes related to the business environment.

All of the information contained herein is verified to the best of our ability and constitutes our judgment at the time of publication; it does not constitute general or specific financial, legal, tax or accounting advice of any kind. This report is based on data collected between July 12 and October 17, 2019, and any error or omission is not BDC’s responsibility. Readers bear sole responsibility for any use they may make of this information.