A growing cost squeeze on Canada’s small and medium-sized enterprises (SMEs) is expected to slow domestic hiring, according to a report from the Canadian Federation of Independent Business (CFIB). Rising fuel and tariff expenses are climbing faster than businesses can pass those costs to customers, tightening profit margins.

How are rising expenses impacting SMEs?

The financial pressure stems from several economic factors affecting small business operations:

  • Fuel costs are causing difficulty for 64% of businesses, a 30 percentage point increase from last year.
  • Approximately 65% of businesses reported negative impacts from the Canada-U.S. trade war.
  • Most businesses are absorbing higher costs to avoid losing customers due to soft demand.

Simon Gaudreault, chief economist at CFIB, noted that many firms are absorbing these expenses rather than risking sales by raising prices. Businesses expect to pass on an average of only about 21% of those higher costs.

Will the cost squeeze for SMEs slow hiring?

Economic forecasts suggest a significant slowdown in the labor market. Payroll employment growth is projected to fall from 1.9% in the second quarter to 1.0% in the fourth quarter. The private sector job vacancy rate eased to 2.6% in the third quarter, leaving roughly 375,000 roles unfilled.

The impact is not uniform across all business sizes. While vacancy rates fell by 0.9 points for the smallest firms with one to four employees, mid-sized firms with 50 to 99 employees saw vacancies increase by 1.0 point.

Broader economic context

These pressures arrive as Canada's gross domestic product (GDP) growth is expected to slow from 2.0% in the third quarter to 1.4% in the fourth. The slowdown is linked to the U.S.-Canada trade war and energy crises. While some areas show resilience, such as 39% of businesses expecting to raise prices by more than 3% next year, the overall outlook remains uncertain. Small business confidence recently fell to its lowest point since early 2025, with many owners planning layoffs over new hires.

FAQ

What is driving the increased costs for small businesses?

Businesses are facing higher fuel expenses and increased costs due to tariffs resulting from the Canada-U.S. trade war.

How are businesses handling these price increases?

Most businesses are absorbing the costs; roughly seven in 10 expect to pass on only a small portion or none of the higher expenses to their customers.