However, economic growth affects business in both positive and negative ways as well. While you won’t see the same pressures as high interest rates and those above, the effects of more activity around the same resources, labor, and customers may spell real stress for some. Even low interest rates have their downsides.
So, what is economic growth exactly? And how does economic growth affect businesses? Get the answers here, and see how you can prepare a flexibly, diverse strategy to take advantage of economic expansion.
Key Takeaway: Any economic change can spell consequences—positive and negative—for business. Depending on your business type and size, make a strategic plan for your business during times of expansion and recession.
What is Economic Growth?
When people mention a growing economy, they usually mean an increase in overall national wealth over a duration, for instance, the fiscal quarter or year. But, these changes are also measured more precisely by economists and analysts.
By their standard, economic growth refers to an increase in Gross Domestic Product (GDP) or the production of goods and services over a span of time. It’s often signaled by advancements in technology, the rise of capital, and even a more skilled, educated, and growing workforce.
What Factors Impact Economic Growth?
Every form of capital can be considered in looking for ways that economies grow and scale over time. That’s because every resource a business has can lead to growth, and, by extension, shared resources lead to economic stimulation overall.
Among the most common are human and material capital as well as precious natural resources and technological advancements. However, “richness” in ideas and flagship processes should also be considered through the element of entrepreneurship.
Let’s consider the features of each to see how their increases lead to increases in the production and creation of goods and services overall:
- Human Resources: The skill, education, and quantity of the workforce directly relate to the scale and speed of economic growth. As expertise, creativity, training, and opportunity increase, the economy is met with higher productivity and innovation, the seeds and substance of growth.
- Material Capital: Physical resources like machines, infrastructure, and raw product used to create finer goods and services also lead to economic growth. These physical realities can limit and recede an economy when “out of stock,” and they lead to higher production levels when in great supply.
- Natural Reserves: Natural resources include elements of the land’s minerals, trees, oils, and almost all matter. When these are extracted from the environment, they can make an economy abundant in the material needed to transform these raw resources into accumulated wealth through products and services.
- Tech Advancement: Huge leaps in the tech sector can lead to massive shifts in economies, as many have noticed with cloud technologies, AI in ecommerce, restaurant automation, and AI for ordering in general. Progress in tech processes frequently stimulates higher production, which translates directly into an overall economic expansion.
- Entrepreneurship: Thought and business leaders also influence the expansion of an economy. By driving growth through new businesses, processes, and ways of working, these idea-first leaders can create jobs and renovate less productive modes throughout the economy.
While economic resources such as these lead to economic expansion, you should note that economic growth is not the same as economic development or health. These factors only predict an increase in GDP, the total standard of goods and services to be produced by an economy over time.
On the other hand, the well-being of businesses and the standards of health for the general population must be measured in other ways, like the Human Development Index (HDI). Because of this difference, all businesses should be prepared for the positive and negative consequences of expansion—just as they attempt to for points of economic shrinkage.
How Does Economic Growth Affect Businesses?
Changes in economic growth, or with the number of goods and services produced over a set period, lead to changes in business—both positive and negative. Here you have a short list of some of the most noteworthy impacts of a growing economy for the businesses that operate within them:
- Raised Employment Rates: Unlike an economic recession which raises unemployment rates, a growing economy increases job opportunities and, therefore, raises the number of people active in the workforce. This means more choice for workers, and more competition for businesses.
- Increased Wage Growth: Because of higher employment rates and more opportunity, wages also increase, which can lead some small businesses to struggle in securing the talent necessary to thrive. Beyond that, some may even struggle to pay the labor and staff they already have.
- Higher Consumer Demand: As wages and employment increase, so does the need and expectation for diverse portfolios of products and services. When people spend more in more categories, the selling price of many products drops with demand, and the increases industry-wide offers.
These consequences are often obvious for small businesses, which currently make up about half of the US economy. They show the signs of economic change first in having less scale and usually fewer resources to flex with widespread economic recession or, in this case, expansion.
How Can Businesses Adapt to Economic Growth?
In response to economic expansion, businesses should consider the ways they can specialize and segment, internally and externally. Look at these methods to meet the occasion of increased spending in more categories, the rise in employee opportunities, and the need for flexibility in strategy overall.
- Facing Consumer Demand: Businesses might ask themselves how to improve customer experiences and business efficiency to compete with the rising number of options on offer. This can mean more specialized, targeted marketing that ensures customer loyalty and impulse buying.
- Supporting Wage/Choice Increases: Especially small businesses should consider how government support can offset the rising cost of wages and the increasing choice that workers have. Consider tax breaks, special grants, and other incentives, asking (again) how to compete.
- Diversifying Strategic Planning: Economic expansions can bring pressures on businesses to pay more for workers and offer more products and services. For businesses to succeed, these goals are served by multiple strategies for growth, like better business intelligence, higher operational efficiency, and streamlined inventory management.
Frequently Asked Questions on How Economic Growth Affects Businesses
Discover how to expand with the economy. Don’t find yourself pushed aside by customers who prefer larger competitors taking advantage of higher productivity and increased opportunity at your expense.
Get prepared for growth by knowing these answers to the most common questions and concerns about economic growth.
Can slow economic expansion hurt business growth?
Some effects of economic expansion can have a negative impact on businesses and their industries:
- Increased spending can mean lower prices as offers also increase.
- Higher employment rates and more opportunities can add new, rising costs.
- Workforce and consumer choice reduces workplace, product, and service loyalty.
To meet these seemingly positive changes when compared to economic recession, businesses can diversify their strategies and continue building flexible operations that thrive in any economic condition.
always create more opportunities?
Economic growth usually means more opportunities for businesses and their workforces, but they are not always distributed evenly for all industries and firms. Typically, these increases come from higher employment, greater spending, and more investments.
However, economic growth doesn’t always translate into better jobs, products, and wealth returns. Instead, many people and small businesses can be left behind in these periods if they aren’t skilled enough to compete with an increased level of competition and activity in nearly every area.
How does technology impact economic growth and businesses?
Technology affects economic growth through higher levels of productivity, the creation of new business categories, and raised standards of living for most.
While economies grow, market inequality may also increase if the largest enterprises make the most gains in productivity and profitability. This stays true when the largest firms are the few businesses that can afford helpful technologies to increase and stimulate growth.
Some productivity-boosting technologies, however, can help almost any business scale during economic growth through lean, cloud-based tech like inventory management software, preferred contactless payment solutions, and sales management tools.