The flow of money between people and businesses through the sale of goods and services is in continual flux. Factors from monetary policy to employment all play their part.
The economic environment influences how businesses act and perform. Economic conditions affect business investments.
Economic influences
Here are 7 economic factors that are known to influence business:
Income
How much people earn dictates their available spending power. The more they earn, the more disposable income there is to spend. Businesses thrive where disposable income is increased.
Unemployment
Fewer employed people means lower consumer spending power. Businesses will make decisions to reflect this change e.g. promote affordability in their product and service offerings.
Interest rates
Higher interest rates increase the cost of borrowing and the benefit of savings. Businesses that offer credit lines typically raise their borrowing rates in line with interest rates.
Inflation
The general cost of goods and services in the economy affects the overheads of running a business, like utilities. Businesses will often examine ways to recoup the cost increases, perhaps by price rises.
Exchange rates
Currency exchange rates constantly change. If the strength of the Pound Sterling weakens vs the Euro, for example, the cost of importing increases. This might persuade some UK-Europe importers to choose UK-based suppliers to avoid the exchange rate cost.
Government bond yields
Business investment decisions are significantly affected by government bond yields. When the yield on government bonds increases, the cost of capital investments increases. This is because government bonds are viewed as a stable alternative to company shares or stocks. So when investors judge whether to invest their capital in a government bond with a predictable yield vs a speculative yield on a company share, the government bond yield is the benchmark. The higher the benchmark, the higher the company stock would have to perform to compete.
Tax
Tax increases tend to slow down spending. And when the government issues tax breaks to businesses, economic activity increases.