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"Effects of Economic Growth, Unemployment, and Inflation on the Business Community"
Effects of Economic Growth, Unemployment, and Inflation on the Business Community
Anthony Pacella
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.


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 2%, the perception is that a return of only 2% 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...

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"Effects of Economic Growth, Unemployment, and Inflation on the Business Community." Aug 16, 2018
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