Businesses are affected by developments in the world economy as never before. The effects of economic change are felt by firms as the plan for the short and long-term. But the best firms plan in increasingly sophisticated ways. This section looks at how some businesses make use of macro-economic data to optimise the effectiveness of their decision-making.
Effective analysis of economic developments means a three-stage process where the firm:
identifies the general impact of change on businesses
narrows the analysis to the firm's operating environment
only then, focuses in on the impact on the firm itself.
An identical macro-economic change can have radically different effects on different companies.
Let's illustrate this by referring to just one aspect of the macro-economy: economic growth itself:
The principal macro-economic indicator is to most analysts and planners the level of economic growth. Confidence among consumers and businesses tends to be stronger during periods of growth, of course. Company profits tend to grow more rapidly at these times; household incomes tend to rise, with resulting positive effects on consumer spending; and, because of the strength of corporate and consumer confidence, longer-term investment and expenditure plans tend to be brought forward or initiated.
But note the use of the phrase, 'tend to'...
The relationship between economic growth and consumer spending, or business profitability is not inevitable. Certain sectors of the economy are more closely linked to changes in economic growth than others. So-called 'pro-cyclical' firms and industries benefit from higher income elasticities of demand. The effect of this is that these firms and industries often experience faster growth in demand for their products and services, than occurs in the overall economy.
So, economic growth is one of the most important elements of macro-economic change. Can you identify some of the others?
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