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Significance of Demographic and Economic Factors on Performance of UK Businesses (Worked Answer to AQA Q24, Paper 1 2018)

  • Levels: A Level
  • Exam boards: AQA

Here is a suggested response to the 25-mark question on the relative significance of demographic factors compared with economic factors on the performance of UK businesses, in the AQA A-Level Business Paper 1 in 2018.

Demographic and economic factors are both potentially important influences on the performance of UK businesses. However, the relative significance of each will depend to a large extent on how a business’ performance is linked to economic conditions or the longer-term changes in demography in the UK.

Taking demographic changes first, it can be argued that these mainly impact UK businesses over a longer term than economic factors and not all businesses will be affected significantly. For example, in the UK (as in other developed economies) the UK is experiencing a slowly ageing population with many adults living much longer, although not necessarily healthier lives. This factor is creating extra demand for services designed to support older people, such as assisted living and new healthcare products and services – which will positively influence the performance of businesses that target the older person demographic. On the other hand, increasing government spending on healthcare caused by an ageing population might be limiting how much is spent on services such as education – but this will only direct influence the performance of the relatively few businesses directly selling into education. Migration is another important demographic factor, and this too has changed significantly in recent years with high levels of inward migration into the UK. It can be argued that this has benefited the performance of UK businesses in that it has increased the supply of labour of both skilled and non-skilled workers, thereby making it easier for UK businesses to recruit and expand. This factor is likely to have been particularly significant for labour-intensive businesses (e.g. food manufacturing, hospitality, retail etc.). Post-Brexit, many of these businesses are concerned that a reverse of inward migration (which might reduce the labour supply) would damage their performance.

Moving to economic factors, it can be argued that the performance of almost all UK businesses are impacted to some extent by changes in the economy. Perhaps the most important factor is the level of economic growth in the economy (GDP) which reflects the overall value of economic activity including consumer spending, business investment and government spending. A period of strong economic growth is likely to benefit most businesses as it implies growing demand in a wide range of markets and industries. During a boom, consumer confidence is high, and incomes rise, which benefits UK businesses selling products where demand is sensitive to higher incomes. Business investment also tends to rise, positively impacting the performance of businesses supplying the goods and services for that investment. The reverse, of course, is also true: relatively few UK businesses saw their performance improve during an economic downturn, although businesses competing using low-cost were particularly successful during the last recession in 2008-9. Other economic factors also impact directly on a large number of UK businesses. For example, changes in exchange rates directly affect any UK business that exports to international markets and/or imports from suppliers based overseas. Changes in exchange rates can also impact performance quite significantly in the short-term too – much more so than demographic factors. For example, when the UK voted to leave the EU there was a sharp fall in the value of the Pound, which made imports more expensive, increasing the costs and reducing the profit margins of many UK businesses.

I would, therefore, argue that for most UK businesses, their performance is still more influenced by economic factors than demographic factors. I justify this because it is hard to think of UK business whose performance is not influenced by economic factors, and changes in those factors can happen quickly and be significant. A sudden economic downturn can impact the sales and profits of every type of business – large and small. A sharp rise in interest rates affects the borrowing costs of every business with debt. A change in corporation tax affects how much tax almost every business pays! That is not to say that demographic factors are not important, and it can be argued that they are becoming increasingly important. However, for most UK businesses it is the economy that matters most.

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