Cleancall
Economic risks
Economic risk is referred to as the risk exposure of an investment made in a foreign country due to changes in the business conditions or adverse effect of macroeconomic factors like government policies or collapse of the current government and significant swing in the exchange rates (Ramachandran, 2021).
Major economic problems in the UK- Economic growth of 4.2% in 2021 and 4.1% in 2022 is projected to be driven by a rebound of consumption, while business investment will remain weak due to spare capacity and continued uncertainty. GDP is set to contract again in the fourth quarter of 2020 as virus containment measures are implemented, and to fall by 11.2% in 2020 as a whole (the United Kingdom Economic Snapshot, 2021).
The inflation forecast is measured in terms of the consumer price index (CPI) or harmonized index of consumer prices (HICP) for euro area countries, the euro area aggregate, and the United Kingdom. Inflation measures the general evolution of prices. It is defined as the change in the prices of a basket of goods and services that are typically purchased by households (Inflation forecast, 2021).
According to the OECD (The Organisation for Economic Co-operation and Development), the inflation for the UK economy is no positive. Due to the ongoing epidemic, inflation is set to exceed its target well into the coming years.
The OECD’s annual Revenue Statistics report found that the tax-to-GDP ratio in the United Kingdom increased by 0.1 percentage point from 32.9% in 2018 to 33.0% in 2019. Between 2018 and 2019 the OECD average decreased from 33.9% to 33.8%. The tax-to-GDP ratio in the United Kingdom has increased from 32.8% in 2000 to 33.0% in 2019. Over the same period, the OECD average in 2019 was slightly above that in 2000 (33.8% compared with 33.3%). During that period the highest tax-to-GDP ratio in the United Kingdom was 33.0% in 2019, with the lowest being 31.1% in 2003 and 2009 (Revenue Statistics 2020 - the United Kingdom, 2021).
Social risks
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Social risk for a business includes actions that affect the communities around them. Examples include labor issues, human rights violations within the workforce, and corruption by company officials (Social, Cultural & Environmental Risks in Business, 2021).
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The unemployed are people of working age who are without work, are available for work, and have taken specific steps to find work. The uniform application of this definition results in estimates of unemployment rates that are more internationally comparable than estimates based on national definitions of unemployment. This indicator is measured in numbers of unemployed people as a percentage of the labor force and it is seasonally adjusted (Unemployment rate, 2021).
According to the world bank survey, the unemployment in UK has been currently rising and is estimated to still rise due to the ongoing covid-19 epidemic.
Age dependency ratio is the ratio of dependents--people younger than 15 or older than 64--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population (Metadata Glossary, 2021).
Analyzing the following chart from the world bank, we can examine the rise in age dependency ratio constantly from 2010 to 2015. This rise is expected to be the same due to the ongoing coronavirus situation.
Technological risk
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Technology risk refers to any risk of financial loss, disruption, or damage to the reputation of an organization as a result of the failure of its information technology systems. Cyber risk is a subset of technology risk, which is the potential for any type of technology failure to disrupt a business (What is technology risk management? 2021).
The graph below is the percentage of individuals using the internet over the total population of the United Kingdom.
According to the following world bank line graph, the percentage of people using the internet has fallen from 94.77% to 92.51% between the years 2015 and 2019.
ICT investment is defined as the acquisition of equipment and computer software that is used in production for more than one year. ICT has three components: information technology equipment (computers and related hardware); communications equipment; and software. This indicator is measured as a percentage of total non-residential gross fixed capital formation (ICT investment , 2021).
Through analysis of the following table by OECD, one can easily make out the constant fall in the investment made in the ICT (Information technology) sector.
CONTINGENCY PLAN
ECONOMIC RISKS
Slow economic growth and fall in GDP
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The economic situation of the UK shall no longer improve unless an effective vaccine is broadly deployed. The risk of further outbreaks shall cause more damages to the British economy. Though, looking at the other side of the coin, something positive can be seen. In its most recent January 2021 update of the World Economic Outlook, the IMF has revised its GDP growth projections for the United Kingdom to 4.5% in 2021 and 5% in 2022 (representing a difference from October 2020 WEO projections of -1.4% and +1.8%, respectively) (The economic context of the United Kingdom, 2021). If the following prediction doesn’t come out to be true, the company shall lower any further investment made and shall focus more on strategic goals to get the best out of the uncertain event.
Rise in inflation
When interest rate/inflation is high, it often results in businesses keeping the money in the banks rather than splurging on new projects (What is Inflation and How Does it Affect Professionals, Businesses, and Individuals, 2021). This is due to the fact that the regular costs of the business suffer a rise and the business is forced to incur such an increase in costs. The only way to eliminate inflationary risk is to accept lower returns. Therefore, short-term inflation hedging is only appropriate for retirees, fixed income investors, and others who would experience a decline in living standards during inflationary periods
(Managing Inflation Risk, 2021).
Increase in tax/ tax-GDP ratio
A corporate tax or business tax is charged on the profits a company makes. For example, a rise in corporation tax has the same effect as an increase in costs which can lead to raised prices within the business (How Does Taxation Affect Businesses? 2021). Similarly, a Fall in such tax results in an increase in profits for the firm. Thus, we can conclude that taxes and profits for a business are inversely proportionate to each other.
Few steps that can be taken in order to reduce the corporate tax are:
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- Claim R&D tax relief.
- Don't miss deadlines.
- Invest in plant & machinery.
- Capital allowances on Property.
- Directors Salaries.
- Pension contributions.
- Subscriptions and training costs.
- Paying for a Staff Party.
SOCIAL RISKS
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Rise in unemployment
This downturn in economic activity will directly affect businesses. Higher unemployment will mean that many households will have less income. For many businesses, this will result in lower sales as people spend less(The economy and business, 2021). This results in a slower growth rate for the company. The first and most straightforward way that a small business can help deal with unemployment is by hiring individuals. Small business owners should hire locals that have the right expertise. They should also give them adequate compensation so that they can empower the rest of the community (WAMAITHA, 2021). This can be done through the creation of more jobs in the company. The human resource department stands responsible for the same.
Higher age dependency ratio
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A higher dependency ratio is likely to reduce productivity growth. Growth in the non-productive population will diminish productive capacity and could lead to a lower long-run trend rate of economic growth (Pettinger, Implications of higher dependency ratio, 2017).
This hinders the growth of the company as lower employee productivity leads to slow growth. Few ways to improve employee productivity include-
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Identify your most valuable employees. All your employees are good at what they do — that's why you hired them.
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Uncover workflow issues. An effective workflow helps you complete more tasks while using as little time and resources as possible.
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Set clear expectations etc (Nevogt, 2021).
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TECHNOLOGICAL RISKS
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Percentage of individuals using the internet
The advent of the Internet has made the presence of businesses global. The communication between customers and businesses increases customer satisfaction and enables businesses to get connected to the customers. The accessibility enables businesses to further expand their service or product, which increases profit (Heath, 2017). The lack of internet access to people obstructs the growth of a business as the employees will be unable to reach all people. Also, the lack of access to the internet by the potential customers can end up demoralizing employee morale as it affects their timely delivery of services. This may also cause a lack or delay in communication. The company needs to hire top IT professionals, who can overcome this issue and keep close contact with potential customers who lack proper internet facilities.
Constant fall in ICT investment
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ICT includes all digital technology that assists individuals, businesses, and organizations in using information. ICT makes a business more efficient, effective and promptly responds to customers' needs. ICT can assist business activities including design, manufacturing, R&D, distribution, and sales and feedback (Information and Communication Technology in Business, 2021). Lack of proper ICT infrastructure doesn’t provide all the following above advantages to the company. This again hinders the utmost performance of the company. To get the best out of this situation, the company needs to set a higher budget and have a strong IT department.
