Evaluating Canada's Inflation: More Buying Power for Small Business

Volumes have been written in the last few months about Canada's inflation rate, currently sitting at 0.25% annually, and the interest rates set by the Bank of Canada. As the 2009 recession is seemingly coming to an end, according to many government and private analysts, speculation exists as to how the interest and inflation rates will be affected.

According to the chief economist for the CIBC, Avery Shenfeld, there should not be any expected growth above non-inflationary potential until sometime in 2011. The economic slack created by the recession is quite large and is expected to persist for a couple of years. Although the Bank of Canada is rather optimistic in its projections, Shenfeld feels that inflation will still feel the downward pressure of a sizable output gap well into next year.

Shenfeld explained that the core inflation rate did not decelerate this year as much as the Bank of Canada predicted. The reason for this deceleration slowdown is due, in part, to a process that economists call the income effect. Essentially, the Bank of Canada has excluded most of the volatile items that have been deflating from the Consumer Price Index (CPI).

Putting aside economic evaluation, the real question is what this means for the average consumer. In real terms, a negative year-on-year inflation rate means an increase in buying power of the average wage. With lower gas prices at the pump, and new, lower mortgage bills, average Canadians will have more money in their pockets when they go shopping. Also important is the strength of the Canadian dollar. The strong dollar is having a dampening impact on retail prices of imported goods.

Mr. Shenfeld's report does not see the projected US recovery as having much benefit for Canada. The US stimulus programs, while spurring economic growth in that nation, contain trade barriers with Canadian manufacturers that historically have benefited from trade with the US. Thus, US recovery may actually dampen some of Canada's economic advancement.

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To Buy the Competitor or Not to Buy

Although the state of the economy is still uncertain, this should not affect whether a company should pursue acquisition of a competitor, if that is its intent. Rather, one should be somewhat more prudent and disciplined in how one evaluates the potential purchase.

During these recent difficult times, the markets have naturally focused their attention on companies in distress. This should not translate into a belief that the entire business sector is in ruins. However, as the competition may be in dire straits due to the present financial crisis should not be a reason to abandon ideas of purchasing that company. Careful assessment of the competitor is crucial. Seek to understand why that company is losing money. Will your investment merely save a struggling enterprise that was on its way to closure anyway or are there other factors at play that will make this a worthwhile purchase?

It is important to dissect the company and understand how it works. Were there management problems? Did the company mismanage its relationships with its customers and suppliers? Were the employees mistreated and, therefore, did they not perform well? Is the machinery sub-standard, thus affecting the product? Examining the company with a fine-toothed comb will allow you to make an effective decision as to whether this company can merge with yours. Similarly, it is important to do a proper evaluation of your own company. Are you in a position to absorb this company? Do you have the management capabilities for this merge? Will your staff cope with the additional production and sales? Will you need capital to overhaul machinery? Similarly, examine your goals. Perhaps you are only interested in expanding your customer base. In that case, go directly to the competitor's customers, rather than affecting a buyout.

Research is your best business ally.

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Creating Jobs and Saving Businesses

Thanks to the Canadian Government's recent investments in the Business Development Bank of Canada (BDC) through the Business Credit Availability Program, the BDC is experiencing a record increase in loans to businesses across the country.

By improving access to credit for Canadian businesses via the Canada's Economic Action Plan and Business Credit Availability Program, the Government is helping the business community not only weather the current economic slowdown but continue to thrive.

Recent statements by Canada's Minister of Industry, Tony Clement, indicate that the Government is pleased with its economic stimulus program. The various programs are creating jobs and saving businesses.

The BDC's increased lending activity has been felt across the country. In June 2009, the amount of loans accepted exceeded figures for the same period in the previous year by 57%. In the first fiscal quarter of 2009/2010, ending June 30, the total dollar amount accepted by BDC loans escalated by 37% from $738 million in 2008 to slightly more than $1 billion in 2009. The BDC reports that this has been the largest increase in its history.

The Canadian Economic Action Plan was designed to assist businesses and entrepreneurs by improving access to financing through enhanced cooperation between government corporations and private sector financial institutions. Financial experts from the BDC have worked closely with their private sector colleagues to ensure that solutions are found to secure funding for creditworthy businesses. Another branch of the Business Credit Availability Program is Export Development Canada (EDC). Working together, EDC and private sector financial institutions are providing more than $5 billion in loans and other credit support to businesses with viable business models but whose access to financing might be restricted.

Private sector and Government – working together to help Canadian businesses thrive.

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