The world’s economy affects businesses each and every day, though not every company takes this into consideration when planning their next business move. As part of the PEST analysis, which so happens to be one of the main analysis tools used in the UK, the importance of economic factors and indicators is undeniable.
Economic indicators are often thought of as the main focus for external environmental analysis, and rightly so. They are most commonly measured and reported by banks, stockbrokers and other government agencies, not least because they can have such a drastic effect on millions of businesses not just in the UK, but across the globe.
Regardless of whether a business operates within retail, financial services or even trading, they depend crucially on specific signals when it comes to deciding on their next steps. Without knowledge of how the economy is performing, determining risk, potential and threat would be practically impossible. For this reason, ensuring that the most prominent economic indicators are covered through analysis is crucial – but which economic indicators do we need to look at?
Whether a business is looking to conduct a full PEST analysis of the UK or just their industry of choice, a number of economic factors need to be considered. These include:
- Interest Rates
- Exchange Rates
Each and every one of these indicators can have a drastic effect on how a business performs and for this reason, keeping up with them all can benefit any company greatly. Perhaps the most widely feared, however, is a recession.
When the economy falls into recession, it has the potential to completely devastate every market. It puts fear into the hearts of buyers, who are less likely to go out and make purchases. As a result of this, businesses aren’t making as much money as before and may need to either reduce their prices, try and find new funding methods until the recession passes or clear smaller volumes of their product or service.
By watching potential recessions in the economy, businesses may be able to better prepare themselves. Whether that’s reducing outgoing costs to save money for when it’s needed, reviewing your inventory management practices to cater for smaller selling volumes, keeping your customers loyal or implementing strategies to win the attention and custom of your competitor’s clients, a PEST analysis can help you to determine the best course of action before the effect can hit.
When it comes to interest rates, indicators for changes are particularly important for businesses who may either offer or rely on loans and credit to operate. With higher, lower and fluctuating interest rates, paying attention to industry trends and getting ahead can help a company either fill a gap in the market at the right time or adjust their interest rates to capture and maintain attention. Similarly, watching how interest rates are changing can help a business secure the best rates at the right time when taking out loans.
On a similar strain, changes in exchange rates affect those operating globally and should be watched in the same way. A change in the exchange rate of two currencies can have a considerable effect on the amount being paid out to suppliers and partners; this then affects profit margins, resource supply and in some cases, can make it difficult to stay on top of budgeting.
Exchange rates can be affected by politics, social attitudes and technological factors and so as a result, it’s a key part of the PEST analysis. Even for businesses looking to offer their services overseas, even if they aren’t operating directly abroad, understanding how postage and pricing may be affected in advance can help them to adjust how they maintain customer retention through offers.
For retail businesses and those offering a service, it’s demand and supply that will truly play a leading part in determining next steps. Being able to take into account the economic demands of the public, in particular, client base can help a business to adjust their operation accordingly.
Whether it’s the increasing demand for free next-day delivery services or the growth in popularity for a particular product that could lead to the growth in value of a particular stock or commodity, demand can have a considerable effect on the economy as a whole.
While businesses need to pay attention to the importance of an economic trend, it’s equally as important that they take into account the rest of the PEST analysis too. A full, in-depth analysis that provides an insight into potential risks or rewards needs to take into account:
- Political Factors – e.g. Tax Policy, Labour Law, Environmental Law, Trade Restrictions and Tariffs
- Social Factors – e.g. Cultural Aspects, Health Consciousness, Population Growth Rates, Age Distribution, Career Attitudes
- Technological Factors – e.g. R&D, Automation, Technological Incentives, The Rate Of Change In Technology.
Writing up your own PEST analysis, or PESTLE if you take into account legal and environmental factors, may not come naturally, to begin with, but by ensuring you cover all of the important signals and indicators, you can better understand your consumers and what your business may face in the future. You can determine what technology is necessary for growth, how the economy could affect your business and how to adjust, and what politics and regulation could mean for your business in the near future.