Economic Factors aqa

An introduction to economic factors

• A range of economic factors can present significant opportunities and threats to business activities 

• Businesses need to anticipate and respond to changing economic conditions in order to maximise their chance of success

• Key economic factors include:

  • Interest rates

  • Employment levels

  • Customer spending

Interest rates

• The interest rate is a percentage reward for saving money and the percentage charged for borrowing money

• Lenders commonly charge interest on borrowing at a higher rate than the rate offered to customers for savings and investments

  • Their rates are determined by the Base Rate, set by the Bank of England and reviewed monthly

• Interest rates in the UK have risen since 2022, following several years at historically low levels

UK interest rates (Bank of England base rate) 2015 to 2024

Impacts of rising interest rates on business

• When interest rates rise, businesses pay more on new loan repayments, which increases their costs

• Businesses may be less willing to make capital investments choosing instead to save their money, which may reduce their rate of growth

• Customers are less likely to purchase goods on credit when interest rates are high, leading to a fall in sales

Level of employment

• The level of employment is a measure of the proportion of people aged 16 to 64 in employment

• Labour costs are amongst the most significant for many businesses, so the employment rate can have a direct impact on the profitability of the business

UK employment rate 2015 to 2023

• As the employment rate rises, businesses often have to pay more to secure enough workers

  • The lower the supply of workers, the higher the salaries or wages they will have to offer

• Businesses may need to import labour from abroad

  • E.g. the National Health Service (NHS) is attempting to overcome staff shortages by recruiting doctors from countries including Egypt and India

• They may need to invest in training to upskill existing workers, and take steps to retain more workers

  • E.g. financial incentives such as employee share schemes or long-service bonuses may encourage workers to remain employed in a business

• Some businesses may also benefit from increased sales when employment rates are high

  • Increased demand, particularly for luxury goods, can be driven by high levels of employment as customers have disposable income to spend

Consumer spending

• Consumer spending refers to the total amount of money spent monthly on goods and services by individuals and households for personal use

• Consumer spending is closely linked to income levels

  • In recent years, average UK incomes have been rising slowly, but have been affected by high levels of inflation

• Higher-income UK households spend around four times more than low-income households and they have a greater ability to save

  • Low-income households spend a greater proportion of their income on necessities such as housing and groceries than higher-income households

• Consumer spending plummeted during the recent Covid-19 pandemic, as a result of few physical outlets remaining open and job insecurity reducing consumer confidence

UK consumer spending

• Since the pandemic, consumer spending has remained below its 2019 level, impacting businesses in a range of ways

  • Businesses selling luxury and non-essential goods have experienced lower sales

    • UK retailers Joules, Ted Baker and The Body Shop have all recently been placed into administration as a result of falling revenue

  • Some UK businesses have introduced flexible payment options to encourage customers to increase spending, but pay in instalments

    • E.g. Luxury retailer Osprey offers the option to pay for goods through Klarna, a third-party short-term credit company

  • Price competition in the grocery market, in particular, has intensified

    • Budget supermarkets such as Aldi and Lidl have grown their combined market share to almost 20%