....and why it matters to your business

We all know the old saying. Making predictions is difficult, especially about the future! If it's so hard, then why do we try? Simply because we all need to use some degree of informed planning in any single thing we do.

This is especially important in business.

I've been involved in market and scenario forecasting for enough years to know that there is no such thing as a crystal ball. No forecast will ever be perfect. But forewarned is forearmed. Being prepared for likely eventualities will put any business at an advantage over competitors without that information.

This competitive advantage can be acquired through various types of forecasts. We work in macroeconomic forecasting, providing a high level view of the domestic retail industry, refined down to various market segments and geographic areas.

The forecasts that we provide can be used by businesses in a number of important ways.

First though, how do we come up with our numbers?

We start from a premise that sounds obvious: the economy is complex. It's complex because it's driven by people and people themselves are complex. The overall macroeconomic climate can be considered as the entire sum of all microeconomic decisions - that is, the sum of every spending decision people make, covering all household, business and government spending.

Since economic activity is the end result of all individual decision-making, it means that theoretically the economy could change as fast as people can change their minds.

In practice though, changes are slow. Momentum exists and consequently we like to keep this momentum as a key factor in our forecasting method.

So instead of working up from micro-level factors we work down from national accounts data and use a technique of trend projection with quarterly moving averages. Here are 5 key things we look at:

Item 1 - The biggest picture

Global growth prospects are important because our national economy fits into this overall picture. Factors which eventually impact on household purchasing decisions have impacts on global growth: things from offshore like currency values and energy costs alter the trade balances of national economies, and this is reflected in the growth prospects calculated by a range of agencies.

We keep an eye on global growth prospects to know what external forces our economy is exposed to.

Item 2 - The national economy numbers

Global GDP is of course the sum of all nations' GDP figures. Knowing how the world's overall economy is expected to perform helps our national economic performance to be estimated as a component of that. We've been fortunate to have experienced sustained growth across times when other similar economies have not been as robust.

The very first number we look at when actually crunching our numbers is national GDP.

This data point is important because forecasts for this take into account many factors that we'd otherwise need to put into downstream calculations.

This includes leading indicators which give early clues to changes in consumer spending. From step one then, variables such as inflation expectations, interest rates, oil price and construction data are built in to our forecasts.

Item 3 - The statistical relationship between all economic activity and the retail sector

There's obviously a positive correlation between these two sets of numbers, and applying that correlation is a vital part of getting our forward numbers. This bit is our secret sauce.

Item 4 - Key industry segments & different geographies

The same statistical approach that lets us isolate forward expectations for the overall retail sector within the overall economy is also used to separate key industry segments and locations. The similar approach means that our models can be used in different markets too, and we cover NZ as well as Australia. Sure, there are differences between the countries, but up this point in the process numbers are numbers.

Item 5 - The human element

All steps to here are simply based on data and numbers. As with any analysis of data though, the value is in the insights and this depends on the acumen that can be applied in reading what the numbers tell us.

To help us put our forecasts in the context of a business advisory message, we provide a qualitative assessment of the industry. To do this, we look at industry confidence and conditions survey data.

This data is collected monthly and we use a 3 month moving average that's less open to short-term fluctuations.

This element is obviously less precise, both in terms of the data that is reported and in the way it can be used in a forecast. It is important though because it gives a great indication of the psychology of the consumer and industry participant. Ultimately, economic performance all comes down to how people act, and this reflects what people think.

So to sum up, here's what we pay attention to:

  • Global growth prospects

  • National growth expectations

  • Retail industry relative contribution to the national economy

  • Relative contributions at industry segment level, and at individual state/territory level

  • Sentiment indicators to support or qualify what the numbers are showing.

Why businesses need this information

A common way of creating internal business forecasts is what we call the wishful thinking approach. Add 3% to the previous quarter's sales and there is the new target. Then, expect to hit the target. As a result, your forecast for the quarter is 3% growth. Easy. It pays absolutely zero attention to the likely purchasing decisions of your customers though. So if spending overall is likely to grow by 6% should a business be forecasting 3% sales growth? Alternatively, if spending is likely to drop to just 1% growth, how likely is a 3% expansion target?

A better approach is to know what the market is doing and match activities to take advantage of this.

With access to state-specific industry growth forecasts, a business can tailor the locations of sales activity to maximize sales where they are most likely to occur. It doesn't have to be random. This is just the same principle as using a calendar to find optimal dates for time-sensitive activities.

Looking at longer-dated forecasts enables some insight to be applied to more strategic decision making, informing decisions such as resource planning (capital expansion or inventory management) and pricing (discount cycles/ re-pricing).

All in all, keeping an eye on industry conditions forecasts helps remove the guesswork and trial-and-error approach that many businesses operate with.