There are many ways to measure a nation’s economic performance. The OECD has declared that the traditional method of using gross domestic product (GDP) is not as effective as once thought. In fact, over-reliance on using GDP as an economic indicator may have caused the 2008 Global Financial Crisis because policy makers across the globe, failed to obtain access to more relevant data. Consumer confidence is just one of the many measures that indicates how the economy is performing. When we take into account all of these indicators, we get a bigger picture of economic health.
Ways of measuring economic performance
As mentioned already, there are plenty of economic indicators available to economists and policy makers. The consumer price index (CPI) measures inflation. This is a regular survey that measures the change in price for a set list of groceries or other goods. GDP more or less measures total economic growth. Unemployment statistics reveal whether a country has a failing GDP and whether businesses have funds to hire staff. National household debt will indicate job losses or high cost of living. A higher debt means that an economic crisis may be imminent. Lastly, there is consumer confidence.
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Get startedHow does consumer confidence work?
Consumer confidence measures whether consumers are positive and optimistic about the nation’s economic situation as well as their own finances. When a research organisation is conducting a survey, individuals will be asked about their savings, potential debts and unemployment amongst other things, and how that translates to their thoughts on the future. A consumer confidence index (CCI) above 100 means that people are fairly optimistic about the economic situation, whereas a score below that number translates to increased negativity.
In an ideal situation, a score above 100 is preferred. This means that consumers are willing to spend more money and save less. A higher CCI may show that there is less household debt or that people are able to eliminate debt quicker. With more money circulating through the economy, this brings prospects of a lower unemployment rate as businesses increase profit and can then hire more employees. As you can see, consumer confidence is a reliable way to measure the economic health. It can also be reflective of other economic indicators too.
What can this mean for business owners?
If you are a business owner, keep a keen eye on the economy, and particularly on consumer confidence. The CCI may be a reliable indicator of how you can expect your business to perform in the future. While as an individual, there is nothing you can do to change the CCI, you may be able to neutralise any negative effects through diligent preparation and planning.
In an extreme scenario, you may be able to stand down employees if there is no available work. Be aware that strict legislative rules apply as to when a stand down will be appropriate. Another option is to make staff redundant, however that option should only be acted on as a last resort. More likely than not, if a business is underperforming, there are other solutions that can be taken. Take advantage of small business tax concessions and learn about some interesting tax deductions for business owners. This can maximise the efficiency of your operations. Also consider forecasting your cash flow to best prepare for what the future holds.
What can this mean for individuals?
Individuals will likely feel the effects of a low CCI as after all, the survey is based on consumer sentiment – and we are all consumers. If consumers find themselves in debt, they can seek help from a debt management lawyer who may be able to assist. If the economy is performing particularly badly, and an individual loses employment, they should ensure that they’ve been laid off according to law.
