A Leading Indicator Skewed By COVID?
04 November 2020
A Leading Indicator Skewed By COVID?
Business applications and economic cycles
An interesting leading indicator for credit-driven economic cycles is the net number of new businesses. The charts clearly show how new business applications tend to lead GDP variations.
- During economic expansion, optimism and easy access to credit lead to the creation of new businesses which in turn fuel the expansion.
- When bank starts to tighten access to credit, which is usually met by lower growth expectations, the YoY change in new business applications goes negative, which may indicate a near recession.
A correlation breakdown
The latest read of this data is intriguing. While we faced a major recession, the rate of change in High-Propensity Business Application jumped massively, apparently breaking what seemed a fairly robust relation.
- In the chart, we only look at Business Applications that are considered to have a high propensity of turning into businesses with payroll.
What drives business creation at times of crisis?
It can be argued that COVID-related layoffs and lockdown have given many the opportunity to start a new business. But was it the only option they had, or does creating a new business suggest an optimism with regards to the future?
- After all, COVID may have, as an unintended consequence, sown the seeds for a new generation of entrepreneurs.
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