Your business doesn’t operate in isolation.
The wider economic environment can influence how your customers spend, how lenders assess risk and how confident you feel about investing, borrowing and planning for growth and change.
This is where economic sentiment can provide useful context. By understanding shifts in consumer confidence, business confidence and broader market conditions, you can make more informed decisions about your finances, operations and future plans.
For business owners, understanding these shifts can provide valuable context when making financial and operational decisions.
What is Economic Sentiment?
Economic sentiment reflects how businesses and consumers perceive the current economy and its likely direction. It’s influenced by factors such as economic growth, employment, household spending, business conditions, investment, inflation and the general cost of doing business.
When economic sentiment is positive, businesses and consumers are generally more willing to spend and invest, while lenders may have greater confidence in a borrower’s ability to service debt – potentially increasing access to finance. When confidence weakens, the opposite can happen.
Sentiment draws on a range of signals that can indicate potential changes in economic conditions. While it doesn’t reflect economic performance in itself, sentiment can allow businesses to anticipate shifts in demand and make better informed decisions about their financial and operational strategies.
What is an Economic Sentiment Indicator?
An economic sentiment indicator is a measure designed to track confidence and expectations for businesses and consumers.
There is no single indicator that captures economic sentiment – a range of measures and surveys are used to assess different aspects of the economy, including employment, consumer spending, cash flow, interest rates and inflation.
Sentiment indicators focus specifically on how businesses and consumers view current and future conditions, while other economic data reflects actual economic activity.
These indicators can be useful for identifying emerging economic trends, as confidence can shift long before those changes are reflected in economic performance or individual business results.
However, economic sentiment indicators are not forecasts and don’t necessarily translate directly into changes in economic performance. It’s important to consider these indicators alongside broader economic data, your own financial results and conditions specific to your industry.
How to Monitor Economic Sentiment
You can monitor economic sentiment through established confidence surveys and other indicators published by government agencies, financial institutions and research organisations.
Commonly referenced Australian indicators include the Westpac–Melbourne Institute Consumer Sentiment Index, the ANZ-Roy Morgan Australian Consumer Confidence Index, and the NAB Monthly Business Survey, which provides insight into business confidence and conditions.
It’s also useful to monitor the following factors and assess their potential implications for your business:
- Interest rates and lending conditions
- Inflation, business costs and supplier terms
- Employment data
- Consumer spending, customer demand and sales
- Business investment and industry conditions
- Cash flow and working capital requirements
How Consumer Sentiment Impacts Your Bottom Line
Consumer sentiment is an important component of the wider economic picture and can influence demand across any industry – especially those that rely on discretionary spending.
When households feel financially confident, they may be more willing to spend on vehicles, travel, renovations, hospitality and other non-essential purchases. When confidence falls, they may delay larger purchases or trade down to cheaper alternatives.
A retailer may see lower demand for higher-value purchases, while a hospitality business may experience fewer bookings. Businesses further along the supply chain – including manufacturers, wholesalers and professional service providers – may also be affected as customers adjust their spending and investment plans.
Monitoring consumer sentiment can help business owners add useful context when assessing demand, forecasting sales and managing cash flow.
How Sentiment Influences Decision-Making
A business may have strong revenue today but delay expansion if it expects demand to weaken, while a business with average current performance may invest if it anticipates stronger growth ahead.
Sentiment economics connects these expectations with real-world decisions, as confidence can strongly influence a business’s risk appetite and determine whether they commit capital or take on debt.
How Economic Sentiment Can Affect Borrowing
Economic sentiment doesn’t directly determine the interest rate a business receives or whether a loan application will be approved. (Those decisions are based on the lender’s funding costs and credit policy, along with the borrower’s financial position). However, the broader economic environment can feed into how lenders assess risk – meaning economic sentiment can indirectly affect access to finance.
When the economic outlook shows signs of weakening, lenders may place greater scrutiny on a business’s ability to manage lower revenue or higher costs. This can affect loan structure, security requirements, pricing and overall lending decisions.
However, a negative sentiment indicator isn’t necessarily a reason to avoid borrowing. It may simply warrant a review of the timing, amount and structure of the proposed loan. Likewise, positive sentiment doesn’t automatically mean it’ll be easier or cheaper to secure finance.
The key is to be fully prepared when applying for a business loan. Strong financial records, realistic cash flow forecasts, sustainable debt levels and a clear explanation of how borrowed funds will be used can help demonstrate your ability to manage your financial commitments, even if conditions change.
Rather than waiting until funding is urgently required, it’s advisable to monitor economic sentiment indicators alongside interest rates and lender conditions – as this will allow you more time to assess whether to borrow now, wait or consider alternative funding.
A business finance broker can help you to assess your options, prepare a stronger application, understand lender requirements and identify the most suitable finance solutions.
Economic Confidence and Investment Decisions
Investment decisions are ultimately about whether the expected return justifies the risk and cost of committing capital. Economic sentiment can provide additional context when making that assessment.
For example, if you’re considering investing in new equipment, there are key questions you should ask:
- Is demand for our products or services improving?
- What happens if demand falls?
- Are costs increasing?
- Are lenders becoming more or less cautious?
- Can the business continue servicing the debt if costs increase?
- Does the investment still make sense under a weaker scenario?
Building a Funding Strategy Around Changing Sentiment
A changing economic sentiment indicator should be used as a prompt to evaluate your finances and review funding plans, rather than as an automatic reason to borrow or delay borrowing.
When economic sentiment is positive, you may wish to review growth opportunities and consider whether your existing funding structure provides enough flexibility.
When economic sentiment weakens, businesses typically focus on financial risk management. During these periods of uncertainty, it’s useful to assess whether you have sufficient liquidity to manage a period of slower demand and adjust your financial plans accordingly.
If the outlook is mixed, avoid making decisions based on one headline or one economic sentiment indicator. It’s important to consider multiple economic signals alongside your industry and business performance to gain a clearer understanding of the broader environment and what it may mean for your business.
This type of scenario planning can also help you determine the most suitable type of finance and loan structure for your business. Regularly monitoring economic sentiment can help businesses identify when it may be time to review their funding strategy as conditions change.
Turning Sentiment into Action
The key takeaway is that economic sentiment can have a strong impact on business performance – from customer spending and investment to sales figures, borrowing and lending decisions. These changes can eventually reach your bottom line.
By keeping an eye on broader economic trends and understanding how they may affect your business, you can make better informed decisions about your finances.
Ledge Finance is a team of commercial finance brokers supporting businesses across Western Australia and nationally. We work with clients across a wide range of industries to structure finance solutions aligned with their business needs, goals and changing market conditions.
If you’re reviewing your funding position or planning your next business move, get in touch with the Ledge Finance team.
