Home Opinion & Blogs The 5 Major Economic Indicators that Affect Startups and Small Businesses

The 5 Major Economic Indicators that Affect Startups and Small Businesses

The 5 Major Economic Indicators that Affect Startups and Small Businesses

People usually get overwhelmed by a load of statistical data such as GDP, Inflation rate, or stock prices. Many find it boring to hear about the news of how the GDP growth rate has fallen or inflation has risen and many ignore the reports of how many jobs have been created or lost.

While these numbers might sound boring, the survival of all the businesses, be it small or big depends on them. The voluminous economic reports and indicators published by the Govt. or private companies provide crucial information about the health of the economy, consumer spending, latest business cycles and key trends in the market. Various economic indicators are released daily, weekly, monthly and/or quarterly.

Let’s look at some of the most common and important macroeconomic economic indicators that affect startups and small businesses. Even if you don’t follow these indices, it is good to know from where analysts are drawing their opinions from.

GDP

GDP is the most common indicator of the health of the economy. The Gross Domestic Product (GDP) values the total number of goods and services produced in a country within a certain period of time. It doesn’t include the income received from the rest of the world. It is the most important and tracked indices for determining growth in a country. GDP is usually released on a quarterly basis in most countries.

Why is GDP important for business? Every company should track GDP to be informed about how the larger economy of which they are a part is doing. For example, China’s economy grew by 6.1% in 2019, and the country has led the world as the fastest growing economy. Therefore, as its economy continues to expand, small businesses have a huge market in China that they can sell their goods and services to. Small businesses suffer the most in countries where the GDP growth rate is slow or negative (recession).

Unemployment rate 

The unemployment rate is the measure of the rate at which jobs are created or lost in an economy. The National Bureau of Statistics tracks this rate and publishes it monthly. High unemployment implies that more people are losing their jobs or don’t have jobs. For the small business, this means low sales and a fall in profit margins and even bankruptcy. The unemployment rate is one of the most crucial macroeconomic indicators of determining purchasing power and consumer spending.

It helps in tracking what sectors of the economy are creating the most jobs or losing as it can be a good way of knowing where to invest or start a business.

Inflation Rate

The inflation rate is a measure of the increase in prices of goods and services in an economy. Nobody likes a high inflation rate, which means that prices of goods and services are rising too fast thus eroding savings and purchasing power. And a very low inflation rate implies that prices of goods and services are stagnant and suggest that the economic growth is flat.

Inflation is one of the most followed headline numbers of an economy. It is tracked by the citizens, foreign investors, banks, government, etc. Depending on the size of the economy, an inflation rate is thought to be manageable if it is in single digits. The Consumer Price Index and the Producer Price Index is used to determine inflation trends. PPI is a group of indexes that measures the changes in the selling price of goods and services over a period of time. CPI measures changes in the prices paid for goods and services by urban consumers for the specified month.  The PPI captures price movements at the wholesale level before price changes bubble up to the retail level.

How are small businesses affected by inflation? A high inflation rate could be a major challenge for them. It means that your goods or services have become expensive for your customers to purchase. Higher inflation also leads to higher lending rate reducing investments. Businesses should become cautious in times of high inflation as it means consumers could cut back on their purchases leading to drop in sales.

Monetary Policy Rate (MPR)

Monetary Policy Rate is a key policy where the Central Bank’s Monetary Policy Committee determines the benchmark rate for its lending to commercial banks when it meets to deliberate on the economy every month. It is a very closely followed event, especially by investors.

Banks usually add a margin on the MPR when they charge interest rates on loans. Suppose, the MPR is increased from 10% to 11%, banks raise their lending rates from about 17% to 21% per annum. If small businesses don’t look out for such policy announcements, there are chances that they might get caught in an interest rate hike.

Share Index

The All Share Index is the leading indicator for the performance of the stock market. In the U.S. the Standard & Poor’s 500 is a market-value-weighted index of 500 publicly owned stocks that are combined into one equity basket. This basket of stocks has become the industry standard and benchmark for the overall performance of the U.S. equity markets.

 The S&P Index Committee chooses the indexed stocks based upon market size, liquidity and industry group representation. Keeping a track of the stock Index is important; it is a measure of the nation’s stock of capital, as well as a gauge of future business and consumer confidence levels.

Growth of the S&P 500 index can lead to the growth of business investment. It can also provide a signal to higher future consumer spending, while a declining S&P 500 index signals a contraction for both businesses and consumers.

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