Contemporary Business Environment Assignment Sample

Introduction - Contemporary Business Environment

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Like many nations fighting the coronavirus pandemic (COVID-19), the United Kingdom is now under lockdown with escalating social distancing measures. As a result, the economy has suddenly and dramatically struck the financial crisis in 2008, perhaps much more severe than it had. In December 2020, gross national product (GDP) was 6.3% lower than February 2020, rising by 1.2% in comparison with November 2020(Flynn et al., 2020). 

In the first part of December 2020, services activity rose following easing of business constraints that had influenced November 2020 in a negative manner. In December 2020, meanwhile, restrictions were further increased. This affected industry development and the data indicated that this was particularly important in certain services sectors (Comunian and England, 2020. The task below shows the effect of Covid-19 on the UK economy and explains the Bank of England’s main responses and their influence on the UK economy. Therefore, the assignment also provides recommendations to the UK Government on future occurrences that will in turn help the government to analyse and implement measures on the long-term impact of the pandemic, Covid-19.

Discussion and Analysis

Impact of COVID-19 on the UK Economy

The worldwide COVID-19 outbreak has had a major economic effect on the United Kingdom. Travel, currency sector, jobs, a variety of sectors and the maritime industry have been severely impacted. In the UK and the world economy this year the International Monetary Fund (IMF) predicts a drop that is greater than in the global economic crisis from 2008-2009(Jallow, Renukappa and Suresh, 2020). This shows how ‘infections reduce labour supply,’ how ‘quarantines, regional lock-out and distant social mobility curtails’ and how ‘closures at the workplace disrupt supply chain and impair productivity.’ It also emphasises how the impact on the gross domestic product of “releases, decreases in incomes, fear of contagion and increased uncertainty” (GDP).

Figure 1: Impact of Pandemic on UK Economy

(Source: Jeris and Nath, 2020)

The Resolution Foundation has stressed that the preliminary economic impacts are determined by “the duration of the outbreak, the restrictions on public health to control the spread of the infectious virus and by other voluntary social separation measures which people adopt in order to reduce their chances of contracting it.” The results of a gradual recovery of the UK economy, which would be shown appropriately in GDP figures, are also an useful reference point (Jeris and Nath, 2020). This explains how these impacts are reflected in GDP figures for generation, revenue and spending.

This shows how they influence the circular revenue flow, which represents the three GDP measurement methods. Theoretically, they are equal. The three approaches are listed below:

Production: this is really the value of the production of goods and services, minus their intermediate inputs and any net subsidy taxes on those items (Houston, 2020). The low demand for services and goods in the UK, which is evident in decreasing sales and in turn company closures, is anticipated to produce less. Employment and working hours also will be reduced, as work will be affected willingly and unintentionally by workers’ residency at homes.

Income: reflects the value of revenue created via sales of goods and services produced, including any net tax on production subsidies and products. Any effect on the demand and supply of products and services in the UK market from COVID-19 will lead to a reduction in the usage of labour, inputs and capital in the manufacturing process (Paterson-Young, 2021). A decrease in the amount of employment and working hours will reduce employee remuneration – particularly wage and wage payment. Profit growth may also be reduced as a result of an increase in the slack level in the labour market.

Expenditure: this really is the worth of the total amount of all (less imports) final expenditures in the business. The consumption of households would show a reduction in non-essential expenditure. Shop closures and voluntary mobility constraints should weigh up some kinds of expenses, while transactions involving direct interaction between customers and companies are anticipated to have an effect (Chinn et al., 2020). The profile and composition of consumer consumption may also be changed, which reflects the household’s behavioural responses to COVID-19.

The likely impact of Covid-19 is explained below:

Unemployment: In the three months until end of May, the Office for National Statistics stated in a statement that the unemployment rate decreased to 4.8 per cent. The ONS noted that this decreased from 5.0% during the three months until February (Keogh-Brown et al., 2020). Unemployment is 0.9% greater than the pre-pandemic figure. However, the employment market has been recovering since March as a consequence of the liberalization of the economy and England is due to leave the lock on Monday next.

Figure 2: Unemployment rate in UK

(Source: Keogh-Brown et al., 2020)

Business failure: In the five-year period after the bankruptcy of the BHS chain, the UK loses 83% of its major department shops. The chart shows the magnitude of the High Street disruption, with the Covid outbreak accelerating changes in the way shopping takes place (Chinn et al., 2020). And over two-thirds of these businesses remain vacant, as revealed by the commercial property research company CoStar Group. A new firm still has some 237 large shops to take over.

Increasing Debt: The government spent billions and billions of dollars to safeguard the economy and to combat coronaviruses. The lockdown has decreased the government’s tax-raising quantity of money. The government has thus had to borrow massive sums of money. In the first pandemic year, it borrowed £299 billion from April 2020 until 2021, the largest amount since 1946(Paterson-Young, 2021). In the current year, April 2021-2022, the government is projected to borrow less but this amount may still be above £200 billion (Houston, 2020). Unemployed or prospective employees pay lower income tax, companies pay less tax if they have smaller profits, and consumers pay reduced VAT if they purchase less. The government has just one choice, with more cash flowing out and less coming in.

Major Economic Responses of the UK’s Government and their Implications 

Bounce Bank Loans

The “Bounce Back Loan Scheme” (BBLS) is a new strategy that has been implemented to assist smaller coronavirus companies (COVID-19). The objective is to help small companies loan £2,000 to 25% of their turnover (the maximum amount authorized is £50,000) ( Pryce, 2021). The scheme is available for most companies that fulfil qualifying requirements before or on 1 March 2020, regardless of turnover. The BBLS is slated to commence on 4 May 2020 until 4 November 2020.

Key characteristics

Lending of up to £50,000: Loans are anticipated to be from £2,000, whichever is lowest, to 25 percent of a company revenue.

100% guarantee: a government-backed, complete guarantee (100%) is provided to a lender for both capital and interest on the remaining balance of the facility (Jaccarini, Kiberd, and Prieg, 2021). However, the debtor remains 100% responsible for debt. It should be pointed out.

Interest rate: The government has fixed a rate of 2.5% per year for the facility

Interest paid for 12 months by the government: the government would make payment of the Disruption of Business to the borrowers, so that the companies are without the costs of starting up.

For the first 12 months, there would be no primary repayments: borrower’s debt payments will not be required for the first 12 months, capital will be repaid in a straight line (Jaccarini, Kiberd, and Prieg, 2021). The scheme is not subject to any guarantee fees for businesses or lenders.

Financial conditions: The loan is six years long, although earlier payback without early repayment penalties is permitted.

No personal safeguards: no personal assurances and no recovery action for a main home or private primary vehicle may be undertaken.

Furlough Scheme

In Spring 2020 Furlough was launched to prevent the laying of people by its employers. It extends across the United Kingdom (Lea, 2021). Traditionally, the government reimbursed 80 per cent of the salaries of individuals who could not and could not pay their employers – up to a monthly maximum of £2,500. Workers were required to pay 10% of their salary in July 2021, with the participation of the government decreasing to 70%.

The government’s share further declined in August and September, currently paying 60%, and employers paying 20%. Employers must also make pension payments to employees and insurance nationals (Kachela, Lodh and Nandy, 2021). The restriction of £2,500 has stayed in force during the whole period, so employees do not see their pay decrease. But the government was hoping that it would push companies to retain employees at the entire time, if possible, by progressively increasing their costs to employers.

Eat Out Help Out Scheme

Another government policy initiative aimed at supporting companies restarting following the COVID-19 shutdown phase was the “Eat Out Help Out Scheme” (EOHO Scheme). On 8 July 2020, it was part of the economic summer update of the Chancellor (Ajzen and Schmidt, 2020). In compliance with the Scheme, 50% off food and/or non-alcoholic drink costs was given by the government to participating companies across the UK. It ran from 3 to 31 August 2020, from Monday to Wednesday all day. The business is eligible for about 8-10 weeks, and appropriate individuals are identified, interviewed, and employed via the scheme. A maximum discount of £10 per head is limited. The system raised the demands of customers in August for food on the Scheme days. Since mid-September eating has nevertheless decreased as restraints have been restored to hostels. EOHO is just one of the UK food services assistance programmes.

Conceived to move traffic out of their houses and to restaurants and bars after the lock-down, the plan has been designed to restore a little of normalcy in their lives as well as a much-needed boost in economic life. The programme was easy: dine at a participating deal every Monday, Tuesday or Wednesday in August and get up to £10 per person for 50 percent off food and non-alcoholic beverages (Fetzer, 2020). There has been no burden on consumers to ask for vouchers or get their money back from the restaurant or Government to promote as many people as possible to take advantage. The participating businesses would instead just make the appropriate deductions before they provide the final bill to the consumers (Ajzen and Schmidt, 2020). There has been no limited use of the programme by the number of individuals and everyone in groups of any size had the opportunity to benefit from the offer. Claims may be submitted seven days after the registration date and may be submitted on a weekly basis.

Kickstart Scheme

In order to provide high quality six-month work placements to individuals 16 to 24 years old on Universal Credit, KickStart is the government’s 2 billion £2 fund. Any kind of organisation such a municipal government, non-profit or business entity may be a Kickstart gateway (Lea, 2020). They act as intermediaries and apply on the behalf for financing. It also may offer the young people on their behalf with employment assistance. For each work, Kickstart gateways will receive £360. Depending on the situation, one will have to pay VAT on this sum. The Kickstart Scheme supports the creation of new “Universal Credit jobs” for the aged 16 to 24 who are at danger of long-term unemployment. Businesses of all sizes may apply for financing covering: 

“100% of the National Minimum Wage (or the National Living Wage depending on the age of the participant) for 25 hours per week for a total of 6 months” 

“Businesses of all sizes may apply for financing covering: Contributions to national insurance”

“Automatic minimum pension enrolment payments”

Major Responses of the Bank of England and Their Implications to the UK’s Economy

(500 words - Select any 2 factors and explain their implications on the UK’s economy)

Reduced Interest Rate

The Bank of England (BoE) has announced an unchanged cost of funding of 0.1%, irrespective of its projected growth above the 2% target in the next months. In a report presented by the BoE on Thursday, it voted collectively on Tuesday’s end-up of the “Monetary Policy Committee” (MPC) to maintain the Bank Rate at 0.1%, reported Xinhua News Agency (Faria-e-Castro, 2021). They also re-established the Term Funding Scheme, that also provided small and medium-sized companies with loans of more than $110 billion. It also reduces the demand of banks for capital buffers by 0%, which is estimated to allow banks to lend more than $200 billion to companies. According to the bank, Britain (GDP) is relying on its unambiguous recovery to pre-pandemic levels more so than 2021, and adds that ‘in some places the yield is now near pre-Covid level, despite its physical decline in others.’ The bank stated that the UK’s (GDP), regardless of the fact that in other sectors it remains significantly below the previous level, was committing itself to recover strongly from pre-pandemic levels by more than 2021(Laddu et al., 2021). Reduced financing cost implies that businesses and individuals get less costly advances. This will reduce the costs for companies and people in Great Britain.

Sustenance of Government Bonds

In order to finance an upturn in public expenditure in light of the coronavirus crisis, the UK Government is planning to issue more bonds in the next three months than it had previously anticipated for the whole financial year. The “UK Debt Management Office” (DMO) said Thursday that, in order to fund the extraordinary steps announced last month to prevent the meltdown of the British economy, it intends to release 180 billion pounds ($222.43bn) of government debt from May to July. In March, the United Kingdom pledged 30 billion pounds (37 billion dollars) in assistance of public health, companies impacted and a wider economic boost to address the outbreak of coronavirus (Moser and Yared, 2021). Conditions in the UK government bond market worsened as the economic effects of coronavirus became evident. The “BoE Monetary Policy Committee” unilaterally voted that an addition of £200billion to a total of £645 billion would be made available for the “asset purchase Facility” (APF), which houses UK Government and corporate bonds. It was financed with money for printing.

Much of this additional cash was used for the purchase of UK government bonds – i.e. debts issued by the UK government (that is, debt issued by companies) (Chinn et al., 2020). The governor of the BoE must have sought authorization from the chancellor to prolong the APF.

What are the likely impacts of Brexit on the UK’s economy?

Immediate Impact 

In combination with the uncertainty surrounding the consequence of EU withdrawal, the continuing worldwide impact of the Coronavirus pandemic (COVID- 19) has helped to increase UK trade volatility in products between 2020 and early 2021(Billing, McCann and Ortega-Argilés, 2019). The influence of the coronavirus and EU departure on UK and worldwide commerce is difficult to completely distance while yet having an effect. Total commerce in products fell by 23.1 percent in the EU, compared to the first quarter in 2021, and fell by 0.8 percent in non-EU nations. The overall trade of products with EU nations excluding precious metals fell by 20.3 percent between quarter 4 (October to December) 2020 and quarter 1 2021(De Ville and Siles-Brügge, 2019). Total commerce of products with non-EU nations fell by less than 0.4 percent over the same time. 

(Source: Billing, McCann and Ortega-Argilés, 2019)

Most economists believe that EU membership does have a significant beneficial economic impact and would make UK trade worse if it left the EU. As according studies by economists at Cambridge University, one-third of British exports to the EU would be duty free, one quarter would face significant barriers to trade, and other products risk tariffs between 1 and 10 percent in a rough Brexit wherein the United Kingdom reverts to WTO standards (Billing, McCann and Ortega-Argilés, 2019). Supporters of Britain’s continuing EU involvement have long underlined the significance of United Kingdom’s membership of the EU as a magnet for FDI. In this regard, international companies see Britain as a gateway to other EU markets and the UK economy as a destination for business. Great Britain is definitely a big beneficiary of FDI.

2.4.2 Future Impact.

Brexit will alter the ties between both the UK and other European nations significantly, and it could open up the possibility for trade agreements to be negotiated with non-EU countries directly with the UK. MPs will soon be able to vote in such a meaningful way on the retirement deal put out by the UK Government in Brussels with EU negotiators (Thissen et al., 2020). There have already been many economic studies targeted at quantifying the probable longer-term effect of Brexit on UK economic production. 

Economists have tried to anticipate this difference by understanding the correlation between trade, investment, and migration relationships between nations and their economic development based on a wide range of economic data. This shows that greater connections between nations have been linked with quicker economic development in the history (and in other areas of the globe). The UK economists are broadly agreed that greater trade, investment and migration connections increase the economic output of a nation (Thissen et al., 2020). Most of the Brexit effect studies show that the UK’s economy will increase more slowly than as an EU Member State after Brexit. In comparison to a scenario if the UK was still an EU member, this forecast ranges from a negligibly low cost to an 18-percent decrease in yield by 2030.

Conclusion 

To conclude, it can be stated that like every other nation the UK economy is also hit hard by Covid-19. In order to protect the economy and fight corona viruses the government has invested billions upon billions of dollars. The lockdown reduces the amount of money the government raises. Therefore, the government had enormous amounts of money to borrow. The UK government also initiated a number of initiatives to counteract the enormous effects of the virus and generally reduced interest rates on the Bank of England. The UK Government will issue more Bonds over next three months than it had previously expected for the whole financial year in order to support a rise in public expenditures in the wake of the coronavirus crisis. Brexit has thus also had a significant effect on Britain’s economy.

Recommendations

A clear approach must be adopted for restoring economic trust that is intimately connected to the trust in people in how the outbreak is being handled and to its economic impact. Even prior to the second wave, it was apparent that in many industrialized nations the economic recovery slowed over the summer.

To prevent a collision course among UK government and the devolved countries that may undermine the Union support, a fresh strategy to the UK’s internal market is required. A good internal market will imply fewer trade obstacles, greater consumer value and a thriving UK economy. The UK Governments need to emphasize on public investment in order to revitalise the UK economy, specifically in terms of increasing expenditure on research & development and productivity growth.