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Economic factors

Watch this video and read this article where we explore economic factors in a PESTEL analysis.
The E factor in the PESTLE analysis is about exchange rates, inflation, unemployment rates, the level of general productivity of gross domestic product within the country or within the region. E is a very important factor because it determines things like how much money is available in the economy to be borrowed. As you know, most businesses are serviced on debt, but a very clever man said many, many years ago that debt has done more to build great nations than oil has and when you think about it, it’s true. An economy where credit cards are easy or easier to access is usually more prosperous than an equivalent economy without access to credit.
This is what the E factor is about, it’s about people’s ability to conduct smoothly economic activities. What’s important for businesses to know in the E factor of economic in the PESTLE analysis is that the environment with the most stable interests, exchange rate, with a low or manageable rate of unemployment is more conducive for conducting business.

Economic factors include economic growth, percentage of unemployment, inflation, interest and exchange rates, and commodity (oil, steel, gold, etc) prices. These affect the discretionary income and purchasing power of households and organisations alike.

Boom and gloom

Economic factors may also affect the availability of credit and finance, and the capacity to purchase or access key resources. Generally, there are periods of boom, as experienced before the 2008/09 financial crisis, followed by periods of gloom, that temper the ability of organisations to produce, and consumers to buy.

A stable political climate with good governance is more likely to generate a conducive economic environment for businesses to thrive. In recent years, the failure of politics and governance in Venezuela and Zimbabwe led to an extraordinary rise in prices (known as hyperinflation). The subsequent contraction of these economies meant households and businesses were overwhelmed by additional costs, leading to mass unemployment, low creditworthiness to access financial facilities, and the unaffordability of foreign goods and currency.

Capital and labour flight

In these conditions, the flight of skilled labour and capital to more stable economies worsen the situation, and it can take decades to enter a new phase of economic recovery and growth, as evidenced in Rwanda after the conflict of 1994.

The key questions here are:

  • What economic factors will affect my organisation going forward?
  • How does the wider performance of the economy affect my organisation at the moment?
  • How is my organisation’s pricing, revenue and costs impacted by each economic factor?
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