The economic climate

The economic climate means the main economic factors that affect how fast the economy grows. It is an external influence: it comes from outside the business, so managers can only react to it. It has nothing to do with the weather; it means changes in things like the number of people in work, prices or borrowing costs.

Every business feels the economic climate, but not in the same way: a change that is good for one firm can be bad for another, depending on what it sells and who its customers are. The main factors are:

• Unemployment — people out of work
• Consumer income — how much households have to spend
• Inflation — the rate at which prices across the economy rise
• Interest rates — the cost of borrowing and the reward for saving
• Taxation — taxes the government takes, such as income tax and VAT
• Exchange rates — the value of the pound against other currencies

Each one affects either how much customers can spend or the business's costs and revenues, so each feeds through to demand, costs and profit.

Why the effect varies

Three things shape how hard a change hits: its extent (a small cost rise is easy to absorb; a large one may force prices up), its duration and whether it is temporary or long-term (a firm can ride out a few months of weaker sales, but years of change force decisions about prices, staffing and investment), and the type of business itself: