Economic Factors (AQA GCSE Business)

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

Diagram: UK Interest Rates (Bank of England Base Rate) 2015 to 2024

Interest rates in the UK rose sharply in 2022, following several years at very low levels (Source: Bank of England)

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

Diagram: UK Employment Rate 2015 to 2023

Although impacted by the Covid-19 pandemic, employment rates have been rising in the UK since 2015 (Source: Office for National Statistics)

• 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

Diagram: UK Consumer Spending

UK consumer spending dipped during the Covid-19 pandemic, and has not yet returned to pre-2020 levels (Source: Statista)

• 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%