Thinking micro is not enough

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory

In the current turbulent period the whole world is going through, business leaders need to stop thinking micro on just their company or their industry or market they operate in. That is surely not enough.

Just in the past few weeks, we have seen a number of events that have affected various macroeconomic factors, which surely impinge on various businesses. On one hand we had the UK mini-budget debacle that has seen the value of Sterling drop like a stone and UK Sovereign debt yields rise, while on the other hand we are seeing European economies battling with higher inflation rates fuelled by the energy crisis. Such high inflation has very much become a big headwind for economic growth as the monetary policy response from Central Banks is an increase in interest rates in the hope that this will control inflation. Such a headwind is obviously creating expectations of a deep economic recession in Europe which is in turn dampening the Euro currency against the US Dollar, which has now fallen below parity.

All the above should make any business leader reflect on how to best shield his or her business. As European economies around us fall into recession, how will this effect Malta’s economy? If European citizens need to make ends meet to pay their high energy bills, will they be able to have any funds left for discretionary spending, like taking a holiday in Malta in 2023? As always, macroeconomic parameters may lead to a decrease or increase in demand for the product or the service a business is offering. Hence, managerial decisions are essential to be made with macroeconomic parameters in mind.

Therefore, any business leader should now more than ever keep a watchful eye on the below macroeconomic parameters, across those economies which mostly affect Malta’s economy:

• Actual and forecasted GDP growth:  Investment growth is closely linked to GDP growth. If savings are generated and foreign direct investment is stimulated, business entities will be able to gain more resources and access new sources of funding. If the economy is to strengthen, management must decide to increase its offering according to demand. The opposite is true if the economy is to recede.
• Another macroeconomic factor that affects business success is the interest rate. A change in interest rate will especially affect businesses that are indebted with loans that are affected by changes in interest rates.  If a business is not ready for an increase in interest rate costs it could lead to a significant effect on the business’ bottom line.
• Employment is another macroeconomic parameter that directly affects businesses from different angles. When unemployment rate rises, businesses have more potential candidates for open positions. However, the downside of rising unemployment is that this will lead to lower consumer spending. So, while unemployment can be good to lower labour costs, it can hurt demand for any business’ output.
• Another macroeconomic parameter that effects business is inflation. When prices for goods and services rise, consumers’ ability to buy goods decreases. In turn, the seller sells his goods and services at a higher price. Inflation will also increase the cost of production. Such increased costs may not always be possible to be passed onto the final consumer leading to a reduction in a business’ profit margins.

Thus, macroeconomic risks have a significant impact on the activity of businesses as they significantly alter aggregate demand and aggregate supply. Because macroeconomic parameters affect a company’s profits, business entities need to monitor macroeconomic parameters on a variety of factors. To succeed in a competitive market, managerial decisions must also consider macroeconomic factors, as assessing the current economic phase is very important for any business.