Small Businesses and Recessions: How to adapt and find opportunities

Author: Kai Niu

Let’s answer the big question first. Is Canada even in a recession? Short answer: no. Long answer: yes, technically. Many small business owners might feel the effects of a recession, but have no idea why or what's going on. What’s the reasoning behind that?

How Recessions Are Officially Measured

To be considered an officially declared recession, Canada’s real GDP must be on a decline for two consecutive quarters, have a greater or equal drop of 1.5% GNI, and 6% increase in unemployment. Currently, in Q1, Canada’s GDP rose by 2.2%, but shrank by 0.3% in Q2. Meaning, if it shrinks again in Q3, we’ve hit the benchmark of two consecutive quarters of shrinking GDP. Meanwhile, our GNI index is fairly healthy. But our unemployment is at 7%, far exceeding the benchmark of 6%. So, while we are not technically in a declared recession, we are at the cusp of it. And we are already feeling many of the negative side effects.

What’s Causing the Pressure? Banks and interest rates are the main culprit. Interest rates rose by 0.25% in 2022, then jumped to 5.0% by mid-2023 to control inflation. The result? Mortgages, credit lines, and business loans all got more expensive. That leads to major cutbacks in both consumer and business spending. Another big factor is our high consumer debt. Canadians are the most indebted households in the G7. According to Statistics Canada, the household debt-to-income ratio is over 180%. That means people owe $1.80 for every $1 earned. And while inflation has slowed to 2.7% as of May 2025, real wages haven’t caught up. Which means less disposable income to buy non-essentials.

How Customer Behavior Is Changing

This shift in the economy directly affects how people spend. There’s a big divide between wants and needs now. People cut their “nice to haves” first—things like premium services, luxury goods, and trendy new products. Think of subscriptions like Netflix, Disney Plus, or high-end brands. Price sensitivity also spikes. Consumers compare prices more, look for deals, and switch brands to save money. Loyalty fades unless your pricing is clearly justified. Larger purchases like furniture, electronics, and vacations are delayed. This is especially true for younger consumers with student debt or high rent.

What It Means for Small Businesses

Retail, cafes, and personal services may see fewer walk-ins and smaller purchases. Online stores could also feel the slowdown unless they offer deep value or something unique. Since customers are spending less on non-essentials, your revenue may fall behind. But your fixed costs—rent, wages, inventory—stay the same. It’s also harder to get financing. Banks get stricter and credit terms tighten. If you rely on lines of credit or were planning to expand, you might have to wait.

Where the Opportunity Is

Here’s the upside. When fear rises, some businesses leave the market. This creates room for the ones that adapt and hold strong. If you stay in the game and deliver value, you’ll come out stronger with a more loyal customer base. Loyalty is earned through consistent quality, fair pricing, and a personal touch. Recessions act like stress tests. Surviving one builds real trust with your audience. Many innovative companies like Uber and Airbnb were born during downturns. When things break, new ideas get a chance.

What You Can Do Now

Start by reviewing your pricing strategy. Offer bundle deals, subscriptions, or loyalty programs to encourage repeat buying. Focus on cutting waste, not sales drivers. Do a deep audit of your spending. Are you paying for tools you don’t need? Like both Canva and Adobe? Choose one. Cut the rest. Customers are still spending—they’re just more cautious. That’s why being in physical stores can build trust. When people can touch and see your product, they’re more likely to buy. Build your brand on honesty and real value.

Final Thoughts

Recessions are tough, but they bring clarity. They force you to see what’s working, what’s not, and where your true value lies. If you can adapt to customer behavior, manage your money wisely, and stay focused on what makes your business stand out, you’ll be in a stronger position when the recovery comes. At Modiv Advisors, we help small businesses make smart, strategic decisions in uncertain times. If you’re rethinking your approach or just need guidance, we’re here to help.