Does your small or midsized business-owning client understand how shifts in the global economy affect the number of customers who come through their door or how much they spend on products? Possibly not.
You might have business-owning clients who don’t see the connection between Greece getting into trouble and the US stock market having a tough time. After all, Greece’s economy at the time represented only about 1.8 percent of the eurozone economy.
Here are several global economic trends to discuss with clients:
1. Currency fluctuation. A strong dollar sounds patriotic; however, it means American goods are more expensive overseas, leading European customers to seek cheaper alternatives. It also affects tourism because European travelers settling their credit card bills back home find themselves paying more for hotel rooms and restaurant meals when they visit the United States. They may choose to stay home or vacation in the eurozone instead.
Bottom line: If you are in a tourist area where overseas visitors are a major presence, such as New York City, Miami, Las Vegas, and Orlando, a strong dollar may hurt business. This might require aggressive discounting to keep your hotel rooms and restaurant seats filled.
2. Interest rates. Business owners might like low interest rates because their business can borrow cheaply for expansion. Meanwhile, savers dislike them because of the puny returns. Rising interest rates typically slow economic activity because certain deals don’t work with higher borrowing costs. If rates on adjustable mortgages rise, homeowners have less to spend, decreasing discretionary purchases.
Bottom line: If it appears we might be entering a cycle when interest rates rise, converting adjustable rate debt to fixed rate may be a good strategy.
3. Inflation. In 2016, the average annual inflation rate was 1.26 percent. In 1980, it was 13.58 percent. The Federal Reserve sees its job as keeping inflation low. Remember the “rule of 72”: An interest rate divided into 72 gives the approximate number of years it takes for prices to double. Compounding interest is a double-edged sword.