TORONTO, Oct. 13, 2011 /CNW/ - Canadian businesses of all sizes are likely to face challenging conditions in the months ahead, according to a report released today by Scotia Economics. Domestic prospects are being constrained by the much slower and uneven pace of economic growth in most advanced nations, amid increasing fiscal restraint and persistently high unemployment. Meanwhile, intensifying debt-related strains in the euro zone and the United States suggest that financial markets will remain volatile during this adjustment period, dampening business and consumer confidence.

"Small firms are particularly sensitive to domestic demand, so their ability to maintain momentum will depend in large part on the resilience of consumer and business expenditures," said Adrienne Warren, Senior Economist, Scotia Economics. "We expect consumers to be cautious spenders for the time being, given high household debt loads and some recent softening in employment conditions. A more subdued outlook for housing and renovation activity will reinforce this outlook."

However, household employment, income and spending trends will continue to have a distinct regional performance differential, with the commodity-sensitive areas benefitting from more buoyant conditions than those regions more reliant on non-resource exports to the established markets in the United States, Europe and Japan.

"While activity in Western Canada and Newfoundland and Labrador is being supported by continued strength in resource-related investments, Central and Maritime Canada's heavier exposure to a slowing U.S. economy suggests relatively more moderate growth prospects for small and large businesses alike," noted Ms. Warren.

The current environment favours firms whose products and services are geared to corporate customers over those that rely primarily on households. While businesses may become more conservative in new hiring and investment in the months ahead, corporate balance sheet strength provides considerable flexibility to maintain current expenditures. Small businesses also will continue to benefit from the ongoing buoyancy in resource-related activity.

According to the report, the best growth prospects for many small firms may lie in their ability to tap export markets, notwithstanding the near-term disruptions to global trade flows. The fast-growing emerging nations in Asia and Latin America in particular offer considerable growth potential. Exporters focused on the more traditional markets of the United States and Europe will undoubtedly be challenged by underlying weak demand and less favourable demographic trends.

"Beyond the adjustment to a more muted outlook for global demand over the near-term, small businesses must continue to adapt to broader longer-term shifts in the economic landscape," concluded Ms. Warren. "Key issues facing small businesses include an aging population, rising immigration, skilled labour shortages, particularly in the construction trades, a high Canadian dollar, and high energy costs."

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.