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How do changes in the economic environment affect international trade?

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What is the current state of the global economic environment?

According to the International Monetary Fund, the baseline global economic growth rate is set to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024 – sitting well below the historical average of 3.8%. This is in part a result of high interest rates, rising energy prices, geopolitical risks and conflicts, and a slowdown in gross domestic product (GDP) for the world’s two leading economies: the United States and China.

These shifts in economic systems, which play out on a global scale, can have profound knock-on effects on international business activities – effects that are keenly felt by business leaders. Research by J.P. Morgan indicates that less than half of UK business leaders are optimistic about the global, national and regional economies, citing threats such as the Russia-Ukraine war, general market volatility, cost of debt and energy prices.

How does the global economy affect the international business environment?

The reasons why a business might choose to ‘become’ multinational are generally divided into two overarching categories: strategic or operational needs. Strategic needs include factors such as avoiding stagnation, increasing business sales and profitability, and mitigating future changes in external environments. Operational needs include factors such as shifting a surplus of production, and sourcing or providing technology, materials or equipment. However, economic activity – whether national or global – presents both challenges and opportunities for these globalised businesses operating on the international stage.

Economic factors shape the landscape of global business operations in a number of ways:

  • Inflation and interest rates. High inflation and interest impact the cost of borrowing, foreign direct investment, and overall cost of production – all of which slow economic growth and can lead to falling stock prices. Faced with high inflation and interest rates, many businesses are forced to increase their own running costs and reconsider investments. Low interest rates, by contrast, give businesses more money to invest and can lead to high economic growth.
  • Supply chain disruptions. Global crises such as pandemics or financial crises and recessions can severely impact supply chain operations. This can lead to shortages of key goods and raw materials, factory closures, shipping and logistical issues, price inflation (as scarcity fuels higher prices), and negative consequences for economic well-being.
  • Government activity and economic policies. Generally speaking, fiscal policy is designed to nurture a strong economy and reduce poverty, and involves adjusting tax and spending levels to monitor and influence a country’s economy. Governments may choose to focus spending and monetary policy on specific sectors – for example, technology, manufacturing or healthcare – which encourages these industries to increase wages and job roles and support wider economic development.
  • Infrastructure and technology. Businesses that operate in developed countries with access to advanced technologies and infrastructure will find it easier to bring goods and services to global markets. Where this is not the case – such as in some developing countries – leaders face additional challenges in marketing and distributing products to overseas audiences.
  • Consumer and market behaviour. Supply (the total amount of goods and services available) and demand (the number of goods and services customers want to purchase) can significantly influence how items within an economy are priced. If supply exceeds demand, prices are likely to decrease; if demand exceeds supply, prices are likely to increase and lead to inflation. Customer purchasing power and changes in purchasing behaviour play an important role in the economy at every level.
  • Unemployment rates. High unemployment rates mean consumers spend less money, due to reduced disposable income and purchasing power. Low unemployment rates generally mean the opposite, with wages increasing, disposable income rising, and consumers being less risk-averse in their spending habits.
  • Exchange rates. Changes in exchange rates typically affect the price of imported or domestic goods that require imported materials or parts. Keeping an eye on exchange rates enables businesses who rely on imports and exports to identify whether they are operating at a profit or a loss, and to ascertain how much they should pay international suppliers. High exchange rates can also impact inflation, investments, and the job market and employment rates.

Other economic factors can include wages, laws and policies, tariffs and tax rates, environmental sustainability and political environment.

What growth strategies can help to safeguard against economic instability?

Which economic factors post the greatest risk to your business?

It’s not just a wise move to protect your business amid changing economic conditions: it’s vital. Leaders should take proactive steps to build business resilience, setting their organisations up to succeed despite the challenges and obstacles that might get thrown their way.

This involves strategies such as diversifying portfolios, nurturing customer relationships, prioritising adaptability, embracing technology and strengthening finances. Identifying specific threats and vulnerabilities will help leaders in their decision making – and enable them to pivot business models or business activities to increase overall resilience.

For some international businesses, this might look like:

  • expanding into new distribution channels
  • expanding into new domestic or international markets
  • adapting an existing business model
  • diversifying supply chain partners and other business partnerships
  • focusing on the most profitable products and services
  • introducing new product or service lines.

With small businesses often the first to suffer – as witnessed during the COVID-19 pandemic – business leaders must prepare to weather adverse and changeable economic conditions well ahead of time.

Use globalisation to your advantage – and lead businesses to success despite economic uncertainty

Develop the skills to navigate complex financial and business environments with the University of York’s online MSc Finance, Leadership and Management programme.

You’ll excel as a capable financial leader with broad oversight of the opportunities, risks and challenges presented by financial markets and industries. Through flexible study that suits you, you’ll learn how to finance long-term strategic ambitions, apply theoretical and fundamental financial tools in the right circumstances, and make decisions that drive business growth and profit. You’ll explore business and leadership topics such as organisational behaviour, operations management, people management and international marketing, alongside specialist financial modules including asset pricing, investment management and corporate financial strategy.