(File photo)

Business expectations among small and medium-sized enterprises across the country dropped to a seven-year low in the second quarter, with Ontario seeing a significant drop in optimism, according to the Canadian Federation of Independent Business.

CFIB's Business Barometer index dropped to 100.7 in June from March's reading of 104.0, marking the index's third consecutive decline and its lowest level since the third quarter of 2001.

"The sharp run-up on fuel prices, coupled with continued weakness in the U.S. export markets, have taken their toll on business optimism," said CFIB's chief economist Ted Mallett in a statement. "The weakness is most pronounced among businesses exporting to the U.S. and those with larger payrolls."

The balance of opinion about the current state of business was fairly even among Canadian SMEs, with about 37 per cent of business of business owners saying their performance is much stronger or somewhat stronger than last year, while 31 per cent said they were doing much worse or somewhat worse.

However, businesses were slightly more positive about the three months and 12 months ahead: 36 per cent of SMEs reported stronger expectations for the traditionally healthier summer season, while 21 per cent of respondents said they were anticipating that their performance would be weaker in the next three months, and 41 per cent of business owners expect improving business performance over the next year versus only 25 per cent who foresee performance weakening.

As well, business owners continued to report relatively healthy levels of demand overall, with about 34 per cent of respondents reporting improving demand during the past three monehts, while 24 per cent have seen it weaken.

Soaring energy costs, however, are putting pressure on SMEs across the country, with 82 per cent of respondents saying fuel prices were hurting business performance. The next most significant causes of worry are product input prices, at 61 per cent of those polled, and wage costs, at 46 per cent.

As a result, 44 per cent of business owners are expecting to increase their prices by more than two per cent, a 10-percentage-point increase from three months ago.

As well, entrepreneurs across Canada appear to be pessimistic about the state of the investment climate, with only seven per cent saying that their investment signals improved during the past three months, while one-third say the investment climate for their businesses has deteriorated.

Nonetheless, wage pressures appear stable and only 38 per cent of respondents are expecting to have to raise wages by more than two per cent in the next 12 months, well below levels from mid-2007.

Business owners are also slightly less concerned about the impact of the strong Canadian dollar on their profits, with 32 per cent of respondents saying they would like to see a lower dollar and 18 per cent saying they would like to see it appreciate against the greenback.

On the employment expectations front, about a quarter of respondents said they plan to add to their full-time staff 12 months from now, but the number is lower than the 30-per-cent outlook seen in March and the number of employers expecting to cut full-time staff also increased by two percentage points to 10 per cent.

While the credit crunch situation appears to still be relatively tight, the report noted that it does not seem to have deteriorated from the previous quarter, since 15 per cent of business owners say credit availability worsened during the past three months, while six per cent said it improved, virtually identical to conditions found in March.

On a provincial basis, most regions reported gloomier outlooks except Alberta, which had a 3.5-point improvement to 106.3.

"The state of fuel prices and supply uncertainties worldwide suggest to business owners there that long-term business opportunities will remain stronger than average," said Mr. Mallett.

Meanwhile, although Saskatchewan and Newfoundland and Labrador businesses were the nation's most optimistic with index levels both at 110.3, both regions saw a drop compared to March's findings, the report said.

Ontario and Nova Scotia posted the largest declines in their business optimism indexes, with readings of 96.9 and 93.3 respectively. Ontario was also one of the provinces to show the weakest staffing plans.

Among the various industry sectors profiled, higher levels of business optimism were generally seen in the services sector, but the construction and hospitality sectors were hit hard by economic uncertainty and the troubles in the food markets.

"The previously robust construction index dropped more than eight points to 98.7 in June, suggesting that economic uncertainty is encouraging businesses and consumers to begin holding off on major real estate outlays," the report said.

The hospitality industry was hit by the expected impact of fuel prices on travel during the peak tourist season, as well as by food price uncertainty, with its index tumbling by more than 11 points to 96.2 from 107.4.

The survey was based on the responses of 1,874 SMEs across Canada.