5 Economic Indicators Every Entrepreneur Should Know
Singapore has entered into technical recession in the 2nd quarter of 2020, after the country’s Gross Domestic Product (GDP) shrank 41.2% from the previous quarter due to COVID-19. The latest GDP estimate, released 14 July 2020, was worse than what analysts forecasted.
A technical recession is defined as two consecutive quarters of quarter-on-quarter contraction; Singapore’s sluggish economic performance was largely due to contractions in the construction, services, retail and manufacturing sectors, and is a sign that the coronavirus pandemic is wreaking havoc across export-reliant economies globally.
Let’s pause for a moment to ask how reading the two paragraphs above made you feel: did the news made you feel nervous and concerned, or are you still pretty much nonchalant about how the economy is doing?
In truth, most people do not pay attention to the economy until something really bad happens either to themselves or the people around them, like friends and relatives being retrenched, or when the owner of your favourite restaurant tells you she’s been forced to shutter her doors for good because “the economy’s really horrific”.
If you are an entrepreneur, a business owner or an investor, you have to pay attention to economic trends: every business or investment decision you make has to take into consideration the macros and micros of the economy, and if you hadn’t been paying attention, you may well just find yourself in trouble real fast.
The good news is that you don’t have to go to business school or graduate with a first-class honours in Economics to understand how the economy works. As Thomas Carlyle put it, “teach a parrot the terms ‘supply and demand’ and you’ve got an economist”.
For this post, we thought we’d like to share 5 key economic indicators we feel every entrepreneur or business owner should know.
1. Consumer Confidence Index
The Consumer Confidence Index (CCI) is an indicator of future developments of household consumption and spending. The CCI is essentially a survey of consumers’ opinions on current conditions and future economic expectations, and given that consumer spending makes up close to two-thirds on average of any given economy’s economic activity, you can understand why this is such an important indicator.
In the most simplistic terms, when the CCI is trending up, consumers are more willing and able to spend more money on goods and services, including luxury items; conversely, when the CCI trends downwards, consumers will withhold spending and save more, indicating that the economy is in trouble or likely to contract further. The more stable and sustainable consumers perceive the economy to be, the more likely they will be willing to spend in today’s terms; the less confident they are, the more they will defer spending today to save more for the future.
Economic growth and development is perhaps the most important indicator for entrepreneurs and business owners affecting business success, be it in a new and emerging market, or in their own domestic market.
One of the most commonly used measurements of economic growth is Gross Domestic Product (GDP), which is simply the monetary value of all finished goods and services made within a country within a specific period of time.
It is important to note that actual market prices are used to calculate GDP, and there are various approaches to calculating GDP. Without attending an Economics 101 class, think of GDP as a snapshot of the economy at any given time period – it allows you to estimate the size of an economy and its growth rate. In other words, GDP gives you an idea of the overall general health of the economy.
Inflation is an important concept because a high inflation rate actually decreases the value of money, and hence consumer purchasing power.
The most commonly used measure of inflation is the Consumer Price Index (CPI), which measures the weighted average price movements of a basket of consumer goods and services over a period of time.
Used together with the CCI, the CPI actually gives you clues about consumer spending and buyer decision-making: the higher the CPI, the higher the rate of inflation, the lower the purchasing power, and hence, a reduction in consumer spending. Easy enough?
Most entrepreneurs and business owners would probably be most sensitive to interest rates: they indicate the cost to businesses and individuals to borrow money. Many small and medium enterprises (SMEs) rely on business loans for financing or for financial leverage (gearing) to increase their return on equity (ROE). High interest rates therefore makes it more ‘expensive’ to borrow and higher company expenses.
Last but not least, one of the most crucial aspects of the economy that affects both business operations and consumer spending, is employment. High unemployment indicates that the demand for labour is lower than the available labour supply – hence lower wages; low wages and high unemployment therefore reduces overall consumer spending in an economy.
High unemployment in a particular sector is also an indicator for investors to avoid or disinvest from that particular sector; when a country’s unemployment rates remain high for a sustained period of time, an outflow of foreign direct investments (FDIs) may follow.
There you have it: FidCorp’s pick of 5 key economic indicators that we feel are vital for every business owner or investor to know and pay close attention to when planning business strategies for the future. We wouldn’t recommend cherry-picking which ones to take note of, and which ones to avoid – if you noticed they are all interlinked, and provide you a broad picture of what is happening to an economy at any given period in time.
Interested to learn more about how FidCorp can help you with starting and growing your business? Talk to us today: email@example.com.