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What Is the Relationship between Financial and Economic Analysis?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 11 August 2018
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Financial and economic analysis are not necessarily the same thing. The process of financial analysis typically involves assessing the performance of some business entity, while economic analysis is an evaluation of the conditions in a regional economy. These two segments, however, do converge and share a somewhat symbiotic relationship. On one hand, financial analysis might underscore the way that economic indicators, such as consumer spending, are trending, while an economic analysis can foretell the type of profits and sales that businesses can anticipate in the future.

Investment professionals perform both financial and economic analysis, although there are typically experts who are designated for each category. Financial analysis may be based on the performance of a business, government entity, or some financial security. Analysis performed on an organization might involve the evaluation of current profits or predictions for future performance based on certain conditions, including but not limited to the economic environment.

Financial analysis may be made at least in part based on some economic analysis. If economic conditions appear to be contracting, this slowdown could have a dampening effect for profits in businesses across certain industries that are especially dependent on a flourishing economy. Performance in financial securities, including stocks and bonds, also tends to be impacted by any slowing corporate profits. Investors often flee stocks in which the profitability picture becomes blurred or weakened in any way.

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When consumer spending is trending lower, retailers might experience slower sales, which can hurt profits. This expectation might be reflected in the financial analysis for retail outlets. By the same token, weakening consumer spending may also be representative of other economic factors, such as unemployment, and can support an economist's forecast for future activity. Some governmental agencies also issue reports to indicate the strength of a nation's economy.

When a bleak economic picture begins turning around, the recovery can also be recognized and expressed through financial and economic analysis. An improving economy could begin with a decline in unemployment filings. This is likely to prompt brighter financial and economic analysis in the markets.

Stronger employment data is an indication of a strengthening economy. Financial experts use this type of shift in the employment landscape to determine other areas in a regional economy that are likely to benefit from a greater number of people working, such as consumer spending. Additionally, the financial analysis for sales performance in consumer-driven industries could similarly improve in an economic environment where more people are employed.

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