Investing.com -- Canada’s economy showed modest growth in the first quarter of 2025 but is expected to contract significantly in Q2, according to the latest Main Street Quarterly report by the Canadian Federation of Independent (LON:IOG) Business. The report reinforces growing concerns that small and mid-sized enterprises (SMEs) are entering a period of heightened stress marked by weak demand, rising inflation, and disruptive trade tensions.
Real GDP is estimated to have grown 0.8% in Q1, but private sector investment saw a sharp 13.9% drop, and CFIB forecasts a deeper contraction of 19.1% in Q2. CPI inflation also surged to 2.4% in Q1 and is projected to climb further to 2.7% year-over-year in the second quarter.
The job vacancy rate held steady at 2.8%, equivalent to nearly 400,000 unfilled private sector roles. But this labor tightness contrasts with plunging business confidence and stalled investment plans, with business owners increasingly uncertain about their future.
“Small businesses are feeling the pinch,” said Simon Gaudreault, CFIB’s chief economist. “The raging trade war will likely drive up the costs of doing business and lead to inflation.” He added that bold reforms, including tax relief and harmonized regulations, are needed for SMEs to catch their breath.
The report highlights that exporters are struggling most to pass on tariff-related costs, particularly in manufacturing and wholesale sectors that are heavily exposed to global trade. Agriculture, hospitality, and arts sectors are meanwhile absorbing more of their rising input costs, making them more vulnerable to margin erosion.
One-third of wholesalers have already raised prices, while two-thirds of firms in hospitality and construction expect to follow suit once supplier costs stabilize. According to CFIB, many businesses may soon be faced with little choice but to pass on rising operating costs to consumers, further stoking inflationary pressures.
“Given how the long-term business confidence is at historically low levels, it’s not surprising that small businesses are pausing their capital expenditures,” said Gaudreault. “It’s nearly impossible for owners to plan expansions or investments when they’re not sure if their business will even be open in six months.”
The report concludes with a call for urgent policy action at all levels of government to blunt the impact of the economic contraction and trade war fallout. SMEs, the report argues, have limited tools and time to cope.