Economic forecasts for SMEs

Nobody starts a business without expectations and plans for its future success, and we all need to make predictions about the future when preparing plans and making key decisions?

While many plans and decisions are based on what happened last year, a view of the future is required. Decisions need to be underpinned by predictions about the market and the economy. While few SMEs carry out formal market research, they are generally well informed about their market and have a good feel for how to satisfy their customers at a profit to themselves. Indeed if they don’t they won’t survive.

SMEs also need to make predictions about the economy and broader market, and how this might influence key decisions: What type of products/ services to provide? How much stock to hold? Forward orders for supplies? Need more or less staff? Increase wages? Can prices be raised? Invest in new plant & machinery? Grow or contract the business? Say “no” to new business? Develop or reduce capacity? Interest rates? Exchange rates? Carriage costs? Invest more on marketing? Buy or lease vehicles? Enter into long term contracts?

The building sector is a good example: is it booming? Or are customers hanging on to their cash? Another is retail: how much and what type of stock to I need for Christmas? Indeed we have seen the recent collapse in commodity prices which has caused the collapse of steel manufacturers.

Despite any economic uncertainty there is still a need to make decisions and SMEs need to develop their own economic forecasts.

There is a wealth of macroeconomic data sources that can provide valuable insights into almost all markets. It may take time to find the ones that are relevant but once found they can become part of a tailored economic forecast for a business.

Baltic Dry - 30-year indexAs an example, the Baltic Dry Index (BDI) is an economic indicator issued daily by the London-based Baltic Exchange that monitors the price of moving the major raw materials by sea. This is relevant because it is a measure of the demand for shipping capacity versus the supply of dry bulk carriers where it takes two years to build a new ship, and the cost of laying up a ship is too high to take out of trade for short intervals. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.

Another is the Shanghai Containerised Freight Index (SCFI) that tracks spot rates (not contractual rates) of shipping containers from Shanghai to 15 major destinations around the world. It can give a useful view of global trade and another perspective on the cycle of boom and bust. Despite many pundits suggesting we are doing rather well, the SCFI has collapsed with the index down 51% since February this year.

SMEs that have their own economic forecasts can use them to inform both short term decisions and long term plans.

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