Effects of Economic Growth, Unemployment, and Inflation on the Business Community

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Put simply, a business's goal is to maximize profits. This requires any company to remain competitive in its market and this in turn requires management to make decisions. These decisions are influenced by the 'business environment'. Macroeconomic factors including economic growth, unemployment, and inflation are part of the business environment and highly influence the decisions of the business.

Inflation

Fluctuating levels of inflation creates uncertainty and firms may be reluctant to commit funds to capital purchases or spend money on R&D. This leads to consumers of the end-products also becoming uncertain and reluctant to spend. Both of these factors could reduce the long term level of economic growth with a slow down in the economic activity.

Inflation also affects a business' international competitiveness. If prices in one country are increasing more rapidly than in competitors', the business cannot compete on price factors. And if less money is spent on R&D, product differentiation is harder to achieve. This has a negative effect on the balance of payments. This has been highlighted for the past 10 years with the amount of offshore operations by UK companies.

Inflation also has effects on the perceptions by consumers of certain industries' performances. One such industry is the UK pensions industry. The industry has been in the spotlight of late being criticized for the lack of growth in funds (in the wake of the devaluations two years ago). To illustrate

• When inflation is running at, say 10% and the return on investment is 10%, consumers are happy and a fee rate of 1% seems reasonable.

• When inflation is running at only %, the perception is that a return of only % on which fees of 1% are being charged is a poor return.

The real increase in value is the same in both instances, it is only the perception that affects the industry.

Unemployment

A disadvantage to industry of high unemployment is the potential of lost profits. In other words, with high employment, firms are likely to produce more and make more profit. The knock on effect of this is that if there is less profit because of unemployment, companies have less funds to invest, reducing the overall level of savings.

The upside of this is that 'a protracted recession with rising general unemployment would, at the moment be advantageous for the construction industry' (www.building.co.uk). There is a skill shortage in the industry, and these skills could come from outside the industry in times of high unemployment.

High unemployment has a double effect for public funds. People, who aren't earning a wage, are not paying tax and they are also claiming benefits, doubling the cost to the economy, reducing public spending, and putting a strain on the construction industry that relies heavily at the moment on public spending.

Another effect on the economy as a whole is that due to the loss of output, GDP will be lowered, weakening the economy.

Economic Growth

Negative economic growth has far reaching implications for private sector firms who work on public sector projects.

When the public sector decreases spending on building works, for example, the construction industry suffers dramatically. The increased taxation introduced in the last two years is partially feeding into public construction works dramatically rebalancing the industry workload away from the private sector.

Thus, 'the construction industry will be very much dependant upon the government's investment plans for its growth over the next three years.' (Constructions Products Association Chief Michael Ankers quoted in 'Building', 00 Issue 5).

Strong growth can also place more pressure on the environment - increased outputs means increased pollution through the increased use of non-renewable natural resources.

Conclusion

Another element to macroeconomics is technological change. Technological progress is the biggest source of economic growth because it means that it is possible to produce more from same quantity of resources. This boosts the potential level of output. It also contributes to rising unemployment leading to a need for 'retraining'.

The pace of growth will depend on scientific skills, quality of education and the amount of GDP devoted to R&D. These factors are heavily dependant on the macroeconomic environment in any given country.

Government policies in the UK are typically aimed at high, steady rate of economic growth. 'Government must create the right environment for business success by providing an economic framework which is stable and enterprising.' www.dti.gov.uk

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