Every day in the news we get inundated by somewhat boring news of how GDP growth rate has fallen by a percentage point or more. We also hear about the inflation rate rising or falling depending on the data from the bureau of statistics. These days, we get to even hear of the jobs report showing how many jobs have been created or lost within a time frame. These news might sound boring for a lot of small business despite the fact that their survival is inherently tied to the numbers. In this article, we will attempt to highlight and explain how macroeconomic indices affecting every startup and small business.
The Gross Domestic Product (GDP) basically values the total number of goods and services produced in a country within a certain period of time. It is one of the most important and tracked indices for determining growth in a country. Small business should also track GDP as it is a pointer to how the larger economy of which they are a subset of is doing. For example, for years China has led the world as the fastest growing economy by posting GDP growth rate of over 10%. What that means is that as the economy continues to expand, small businesses have a near infinite market that they can sell their goods and services to. In contrast, small businesses suffer the most in countries where GDP growth rate is slowing or negative (otherwise said to be in a recession).
The inflation rate basically is a measure of the increase in prices of goods and services. It is also one of the most followed headline number of any economy as it is tracked by 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. High inflation rate means that prices of goods and services are rising too fast thus eroding savings and purchasing power. A very low inflation rate also means prices of goods and services are stagnant suggesting the economic growth is flat. For small businesses, higher inflation rate could be a major challenge. For example, it could mean that your goods or services may be too expensive for your customers to purchase. Higher inflation also often leads to higher lending rate as the next indices below explains. Businesses should therefore be worried when inflation numbers rise uncontrollable or hit double digits as it means consumers could cut back on business leading to drop in sales.
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Nearly every other month the Central Bank’s monetary policy committee meets to deliberate on the economy. It is a very closely followed event as investors in Nigeria and all over the world focus on the decision made at that meeting. One of the key policies made is the Monetary Policy Rate (MPR) where the MPC determines the benchmark rate for its lending to commercial banks. Banks typically add a margin on the MPR when they charge interest rates on loans. For example, when the MPR was increased from 12% to 13% banks raised lending rates from about 19% to 23% per annum. For small businesses who don’t track such policy pronouncements or anticipate it they often get caught in an interest rate hike trap.
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The unemployment rate basically measures the rate at which job is created or lost in an economy. The National Bureau of Statistics also tracks this rate and publishes it monthly. A high unemployment rate is probably one of the best indicators of purchasing power and consumer spending. If unemployment rate is on the rise, it means more people are losing their jobs or don’t have jobs which for small businesses simply means slower sales, smaller profit margins and even bankruptcy. It is also important to track 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.
Price of oil
Unlike the others the price of oil is quoted nearly on a daily basis. However, the amount of crude oil produced daily is not known till the end of the month. Nigeria’s is expected to sell at least 2.2million barrels of oil per day. Selling less means smaller revenue for the government. The Nigerian government is one of the primary sources of stimulus for the economy and gets over 70% of its revenue from oil. If oil price and production are falling then it is an indicator of very slow economic growth. Already most small businesses in the tourism sector are feeling the brunch as oil companies cut spending massively due to drop in the price of oil. As a small business, this indices should be watched closely to avoid falling into a collateral damage.
All share index
The all share index is the leading indicator for the performance of the stock market. Whilst its effects in Nigeria is not that much it is often the bell weather in most developed countries. Even though the Nigerian stock market makes up less than 15% GDP it is still a very important tool that should tracked by small businesses and startups. An All Share Index that is on a free fall is often an indicator of what is to come. For example, the Nigerian stock market as early as November 2014 displayed the earliest sign of how tough 2015 will be when it had a major sell off. Investors sold of shares in droves as they predicted the price of oil will fall further leading to a devaluation of the naira. Small Businesses and Startups who tracked this number would have planned very well ahead to avoid the consequences.