Central bank interest rate hikes and the looming spectre of a potential 2023 recession spell tough times ahead for small businesses in Canada that are still recovering from “two years of hell” during the COVID-19 pandemic, said an economist with the Canadian Federation of Independent Business (CFIB).

“I think it's going to be very tough for a lot of them,” Simon Gaudreault, chief economist and vice-president of research with the CFIB, said in an interview with BNNBloomberg.ca after the Bank of Canada announced it was raising its central interest rate again by 50 basis points.

“This has a big impact on a lot of small businesses.”

The policy move, along with other economic signals like an inverted yield curve, has further ignited speculation that Canada is headed for a recession next year – something Gaudreault said small businesses are ill-prepared for, with more than a quarter already considering permanent closure, according to CFIB data, and pandemic recovery “far from complete on Main Streets.”

“Usually when you enter a recession, it's after eight years of economic growth,” he said. “This time, when they’ve just been through two years of hell and they're expecting possibly a recession at the beginning of (next) year, it's putting them in a tough spot, no matter how creative they are.”

Gaudreault said data from his organization shows that two-thirds of small businesses have some kind of variable-rate loan attached to their businesses, making them especially vulnerable to short-term impacts from higher interest rates.

At the same time, small businesses are struggling with debts accrued during the pandemic when governments introduced economic restrictions as measures aimed at controlling the virus, and many still have not seen a return to pre-pandemic revenue levels, Gaudreault said.

Another concern for small businesses is expected increases to Employment Insurance and Canada Pension Plan premiums, Gaudreault said. The federal government has also said it intends to seek repayment of some pandemic loans to businesses next year.

The CFIB is asking for the loan repayment deadline to be extended into 2024, for the government to consider forgiving more of the loans, and that it look closely at the timing for insurance premium increases that could further hurt businesses, Gaudreault said.

“It has the potential to crush many businesses that we're finally starting to see a small light at the end of a long tunnel,” he said. “A lot of them just need a bit of a break and more time to recover.”