Economic Analysis
Economic Analysis
No company can work & live in isolation. Similarly, no industry can exist in isolation. It may have magnificent managers & tremendous products. However, sales & costs are affected by uncontrollable factors - the world economy, price inflation, taxes, etc.
Political Environment :
A stable political environment is necessary for the steady growth of the country/economy.
- If a country is ruled by a stable government that takes decisions for the long-term development of the country, industry & companies will improve.
- If an unstable political environment rules the country. There will be tremendous losses such as Foreign Direct Investment ⬇, Investment ⬇, Tourism ⬇.
- International events to impact industries & companies. In similar wars between countries to impact industries & companies.
Foreign Exchange reserves :
- A country needs foreign exchange reserves to meet its commitment, pay for its imports & service foreign debts. Without Foreign Exchange Reserves, a country would not be able to import material or goods for its development & there is also a loss of international confidence in such a country.
- If companies export to such low reserves countries have to be careful as the importing companies may not be able to pay for their purchases because the country does not have adequate foreign exchange.
Restrictions on import :
- If a company is dependent on its raw materials on imports. Similarly, India has many restrictions on what may be imported & at what rate of duty. This determines the price at which goods can be sold.
- When viewing a company, it is important to see how sensitive it is to governmental policies & restrictions on imports.
Balance of trade / foreign debt :
If the foreign debt is very large, can be a tremendous burden on an economy.
**A trade deficit occurs when a country's imports exceed its exports during a given period. It is also referred to as a negative balance of trade (BOT).
- If imports exceed exports then the country will have a tremendous burden.
Inflation :
Inflation has an enormous effect on the economy. Within the country, it destroys purchasing power. As a result, demand falls.
- If the rates of inflation in the country is high from which a company imports then the cost of production in that country will automatically go up.
- Conversely, if the rate of inflation in the country is high to which one exports, the products become more attractive resulting in increased sales.
Latest CPI Inflation Rate
Currency Exchange Risk :
This is a real risk, the effect of a revaluation or devaluation of the currency either in the home country or in the country the company deals in.
- A devaluation in the home country would make the country's products more attractive in other countries. It would also make imports more expensive & if a company is dependent on imports, margin can get reduced.
- On the other hand, a devaluation in the country to which one exports would make the company’s products more expensive and this can adversely impact sales.
The Threat of Nationalization :
Nationalization is a real threat in many countries. Nationalization company has proven historically less effective than private sector/ companies.
- If any companies are dependent on nationalization companies results will be an unstable & time taking process.
- In addition, the fear of nationalization blocks private investments in that country.
Interest Rate :
- A low-interest rate expands/stimulates investments & industry.
- On the other hand, high-interest rate results in a higher cost of production & lower consumption. When the cost of production is high in companies then performance also reduces.
Taxation :
The level of taxation in a country has a direct effect on the economy.
- If tax ⬇, people have more disposable income. So people work harder & earn more. This is good for the economy.
- In every economy, there is a level between 35% - 55% where tax collection will be the highest.
- If any country's tax exceeds the above limit, then the collection will decline.
The highest tax collecting country in the world is Ivory Coast - 60%.
Government Policy :
Government policy has a direct impact on the economy/industry/companies.
- Pradhan Mantri Awas Yojana is an initiative by the Government of India in which affordable housing will be provided to the urban poor with a target of building 2 crore affordable houses by 31 March 2022. This scheme benefits cement sectors, Real estate, etc.
Gross Domestic Savings :
*Gross Domestic savings = Gross Domestic Product - Final consumption.- The utilization of Domestic savings can accelerate economic growth.
- Rising GDP means more jobs are likely to be created & workers are more likely to get better pay rises.
- If GDP is falling, then the economy is shrinking bad news for businesses & workers.
- If GDP falls two quarters in a row, that is known as a Recession.
The infrastructure :
The development of the economy is dependent on its infrastructure.
- The industry needs electricity to manufacture & roads to transport goods.
- Bad infrastructure leads to inefficient, poor productivity, wastage, delays.
Budget deficit :
A budget deficit occurs when government expenditure exceeds its income.
- Expenditure stimulates the economy by creating jobs and stimulating demand. However, this can also lead to deficit financing & inflation.
- To control the budget deficit government normally cut government expenditures this would also result in a fall in money supply & a fall in demand which will check inflation.
- All developing countries suffer from budget deficits as governments spend to improve the infrastructure - building roads, power stations, etc.
Monsoon :
Employment :
High employment is required to achieve good growth in national income. As the population growth is faster than economic growth unemployment is increasing, This is not good for the economy.
Latest India Unemployment Rate
Economic Cycle / Business Cycle
Countries go through each stage of an economic cycle, each stage impact industries, companies in a different way.
- It affects investment decisions, employment, demand, and the profitability of companies.
- While some industries such as shipping or consumer durable goods are greatly affected by the business cycle, others such as the food or health industry are not affected to the same extent.
Boom :
The economic boom phase is the peak phase of the economic cycle & demand reaches an all-time high. It is also known as the growth period.
Recession :
The economy slowly begins a downturn. Demand starts falling. Interest rates and inflation begin to increase. Companies start finding it difficult to sell their goods.
Depression :
Recovery :
During this phase, the economy begins to recover. Investment begins anew and the demand grows. Companies begin to post profits.
Comments
Post a Comment