The Macroeconomic Environment Introduction - Business Environment

In September 1992, following a period of sustained turbulence on the foreign exchanges, the British government decided to withdraw sterling from what was then known as the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). As a result, the value of the pound continued to fall against a number of currencies, particularly the Deutsch mark (DM) and large-scale speculation against sterling forced its value down to a level well below its previously agreed ‘floor’ in the ERM. Freed from the constraints of the ERM, the British government announced a series of cuts in interest rates in an effort to boost the British economy, which at the time was in the midst of a substantial recession. These cuts in interest rates together with the more favourable exporting conditions resulting from a weaker pound were welcomed by most British businesses, which were struggling to find customers. At the same time, a number of influential commentators from both the academic and the business world warned of the likelihood of increased inflation in the future as a result of dearer import prices and of the uncertainties caused by a free floating currency. Business leaders, in particular, called for a statement of government intentions and for a clear guide to future government economic policy with regard to inflation, recession and membership of the ERM. Over a decade later, Britain still retains a measure of independence in currency matters, having declined to commit itself to adopting the ‘Euro’ in the first wave of monetary union within the EU.

What this simple example is designed to demonstrate is the intimate relationship between business activity and the wider economic context in which it takes place, and a glance at any quality newspaper will provide a range of similar illustrations of this interface between business and economics. What is important at this point is not to understand the complexities of exchange rate systems or their effect on businesses, but to appreciate in broad terms the importance of the macroeconomic environment for business organisations and, in particular, the degree of compatibility between the preoccupations of the entrepreneur and those of the economist. To the economist, for example, a recession is generally marked by falling demand, rising unemployment, a slowing down in economic growth and a fall in investment. To the firm, it usually implies a loss of orders, a likely reduction in the workforce, a decline in output (or a growth in stocks) and a general reluctance to invest in capital equipment and/or new projects.

In this section the focus is on the broader question of the economic structure and processes of a market-based economy and on the macroeconomic influences affecting and being affected by business activity in this type of economic system. As suggested in the previous chapter, an understanding of the overall economic context within which businesses operate and its core values and principles is central to any meaningful analysis of the business environment.

Three further points are worth highlighting at this juncture. First, business activity not only is shaped by the economic context in which it takes place, but helps to shape that context; consequently the success or otherwise of government economic policy depends to some degree on the reactions of both the firms and markets (e.g. the stock market) which are affected by government decisions. Second, economic influences operate at a variety of spatial levels as illustrated by the plight of the pound and governments can find that circumstances largely or totally beyond their control can affect businesses either favourably or adversely. Third, the economic (and for that matter, political) influence of industry and commerce can be considerable and this ensures that business organisations both individually and collectively usually constitute one of the chief pressure groups in democratic states. This political and economic relationship between government and business is discussed more fully.

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