Economic factors affecting business

From CEOpedia | Management online

Economic factors affecting business include all important trends in the economy that can help or hinder the company in achieving its objectives. Economic factors that commonly affect businesses include consumer behaviour, employment factors, interest rates and banking and inflation and overall economic indicators. They also include several legal regulations in the country, which are described in: Legal factors affecting business. Analysis of economic factors is integral part of every strategic analysis method including PEST analysis, STEEP analysis, PESTEL analysis, PESTLE and other derivatives of strategic business environment analysis.

Consumer behaviour and confidence level

Consumer behavior and confidence level are important economic factors that can greatly affect a business. Consumer behavior refers to the actions and decisions made by individuals and households when purchasing goods and services. Consumer confidence is a measure of the overall economic health and is reflected in the level of consumer spending.

A high level of consumer confidence can lead to increased spending, which can benefit businesses by boosting sales and revenue. When consumers feel confident about the economy and their personal financial situation, they are more likely to make large purchases such as cars, appliances, and homes, which can drive economic growth.

On the other hand, a low level of consumer confidence can lead to decreased spending, which can negatively impact businesses by reducing sales and revenue. When consumers feel uncertain about the economy and their personal financial situation, they are less likely to make large purchases, which can slow economic growth.

Factors that can influence consumer behavior and confidence include interest rates, inflation, unemployment, and government policies. For example, high interest rates can make borrowing more expensive and discourage spending, while low unemployment can boost consumer confidence and encourage spending. Government policies can also affect consumer behavior and confidence, such as tax cuts, regulations, and monetary policies.

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  • optimism of consumers,
  • belief in overall good state of economy,
  • willingness to spend money and buy new products,
  • level of spending
  • purchasing power of potential consumers (amount of money or savings available),
  • levels of market demand and supply
  • bargaining power of customers,

Economic indicators regarding employment

There are several economic indicators that measure employment and the state of the labor market. Some of the most commonly used indicators include:

  • unemployment rate and trends in overall employment level (high unemployment means fewer people with buying potential),
  • number of jobs created in the market,
  • competition in job market (necessity to pay higher wages),
  • high priced jobs/ low priced jobs, overall labor costs,
  • number of highly skilled specialists,
  • number of employees seeking jobs,
  • number of people near the retirement age,
  • level of income in population (income per capita),
  • differences in income, level of economic inequality,
  • risk of lay-offs,
  • strength of trade unions,
  • additional burdens on salary,
  • social and health insurance rates,

All those indicators help to understand the state of the labor market, employers' and employees' behavior, and to anticipate any potential changes in the economy. A decrease in the unemployment rate and an increase in payroll employment, for example, may indicate a strong and healthy labor market, while an increase in jobless claims and a decrease in labor force participation rate may indicate a weak labor market.

Additionally, the number of people who are underemployed or have dropped out of the labor force altogether can also be used to gauge the health of the labor market.

Economic factors regarding money, interest rate, banking, etc.

Money, interest rate, and banking are all closely related economic factors that can have a significant impact on businesses and the overall economy.

  • interest rates (determines costs of financing of business and investment activity),
  • overall level of debt,
  • level of government debt,
  • inflation rate, and inflation perspectives,
  • monetary policy, supply of money,
  • rating agency evaluation of country,
  • banking facilities and level of services (e-banking, Internet banking, etc.)
  • financial market condition, asset prices, freedom in trading
  • phase of economic cycle (prosperity, recession, depression, recovery)
  • availability of mortgage debt,
  • exchange rates,
  • influence of international organization (WMF, World Bank, etc.),

All those factors are closely related and interdependent, changes in one of them will affect the others. For example, the central bank can influence the interest rate through monetary policy, which can affect the money supply and the economic activity, and in turn, the banks will adjust their lending policy and interest rate they charge.

Investment market and production factors availability

Economic factors can have a significant impact on the investment market and the availability of production factors. The investment market is the market where companies raise capital by issuing securities such as stocks and bonds. Economic factors that can affect the investment market include interest rates, inflation, and economic growth. High interest rates can make borrowing more expensive and discourage investment, while low interest rates can encourage investment. Inflation can also affect the investment market by eroding the value of fixed-income investments such as bonds. Economic growth can also affect the investment market, as investors are more likely to invest in companies that are growing and have strong prospects for future growth.

Production factors refer to the resources used to produce goods and services, such as labor, capital, land, and natural resources. Economic factors can affect the availability of these resources, and in turn, the cost and efficiency of production. For example, an increase in the cost of raw materials or energy can increase the cost of production and make it less profitable for businesses to produce goods and services. Similarly, a shortage of skilled labor can make it more difficult and costly for businesses to find the workers they need to produce goods and services. Government policies such as taxes, regulation, trade policies can also affect the availability of production factors.

Overall, economic factors can influence the investment market and the availability of production factors in various ways. The key economic indicators such as GDP, inflation, and interest rate can give an overall picture of the economic health and predict the future direction of the economy.

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References

Author: Krzysztof Wozniak

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