Economic factors of PESTLE Analysis are one of the most crucial parts of a business environment. These factors define the future value or profit of your business. Interest rate, monetary value, inflation, recession, etc. represent individual pointers that can either flourish or destroy your business. That’s why monitoring the economic environment is essential.
What are the Economic Factors of PESTLE Analysis Affecting Business Organization?
Economic Growth Rate
The amount of investments made in the business of an economy indicates the Economic Growth Rate. It shows how many potential enterprises have in the long run. We measure economic growth through GDP and GNP. The higher the growth rate, the higher the standard of living, which means higher demand and purchasing power as well. It gives businesses a scope to increase their production and gain more top sales and profit margins. A country with a higher economic rate also opens the opportunities to restructure the underdeveloped sectors and start new businesses.
Exchange Rate
We all know a country which exports more import, has a flourishing business environment. The exchange rate mostly affects importing and exporting. When a country’s currency exchange rate is lower than other countries, businesses from the country with a lower exchange rate enjoys increased exporting of their products to other countries. As a result, businesses earn a lot of foreign money from countries with higher currency rate and contributes to the economy. But when the exchange rate gets higher of a country, businesses of that nation tend to lose their exporting opportunities, and the scope of earning foreign decreases. A lower exchange rate mainly works for those countries which have valuable resources or products to sell. Otherwise, it’s a curse.
Demand & Supply
Demand and supply are what affects the business the most. Demand is the market measurement of consumer willingness of how much they wish to purchase the goods and services of a business. On the other hand, supply is the market measurement of products and services that are available by the producers or enterprises. Demand and supply control the market price of different goods and services of an economy. If there is more demand than supply, the market price rises. And if there’s more supply than demand, market price falls. That’s why a moderate level of demand and supply is necessary to stabilize an economy’s business activities.
Interest Rate
A stable interest rate is essential for business. If the banks and other financial organizations of an economy keeps increasing the interest rate for various loans and investments, it creates pressure on both the consumers and business. Consumers tend to cut their spending on different things, which means businesses lose the chance to sell more. The consumption of luxury items also decreases. And the cost of operating business rises as well. The opposite effect happens when the interest rate drops for loans and finances. At that time, people’s consumption rate and business’s selling percentage both increases.
Inflation
These two terms actually represent the situation of an economy and the businesses. Inflation occurs when the general price of goods and services increases. It may sound a good thing for businesses, but most of the inflation reduces the purchasing power of a bigger portion of the population because of the lower rate of income rate growth than the inflation rate. As a result, people tend to consume less, which doesn’t bring any good for business even though the prices have increased.
Unemployment
It may sound cruel, but a higher unemployment rate is suitable for businesses. Because when there’re more supply of workers than demand, companies have a choice to choose and offer lower wages because people are desperate to have jobs. In that way, businesses can reduce their operating cost. But when there is less unemployment in an economy, the demand of the workers gets higher, and companies have to offer more to compete with others and get those few available workers.
Although higher unemployment has some adverse effects as well, too many employed people mean a lower standard of living and a lower consumption rate, which decreases the selling and profit margin of businesses.
Tax Rate
Tax is something that is mandatory for both consumers and businesses. When the tax rate increases, the cost of operating business increases as well. Also, people reduce their consumption rate to meet the higher tax. A higher tax rate also creates an obstacle for new entrants and their growth. It discourages people from starting or continuing business activities. But the opposite happens when the tax rate is lower. That’s why businesses always expect a lower tax rate from the government.
Bottom Line
Economic factors are mostly uncontrollable for businesses. No matter how much we anticipate the future economic effects of a country, there’s no guarantee precisely that’ll happen. That’s why it’s necessary to have a strict observance of economic changes and take appropriate precautions.
Related: Economic Benefit of World Cup & Economic Factors affecting Tesco
References
- https://www.tutor2u.net/economics/reference/strategies-for-improving-business-profitability
- https://www.bradfordjacobs.com/blog/5-economic-indicators-that-affect-business-success/
- https://smallbusiness.ng/how-economy-affects-business/
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