Principles of International Business
International business has a wide category of business news from all over the world. One particular article that grabbed my interest was an article in the British Reuters newspaper. The article was published on 21 November 2012 on Reuter’s business segment. The article was about the widening budget deficit and its effects on Britain’s economy. This paper analyses the above-mentioned article. In addition, it addresses the implications of the deficit budget on British government, British corporations and international businesses.
ARTICLE- WIDENING BUDGET DEFICIT CAUSES ECONOMIC GLOOM IN UK
According to the UK based newspaper, Reuters, the article reveals the economic implications that could arise due to the government’s debts. With the increased borrowing rates there is a widening gap in the budget deficits that could down the economy into another recession. August had the highest borrowing rates on record according to Reutes; businesses in UK are much weaker as the economy struggles to recover from the previous recession. This is also a blow on the Chancellor of Exchequer, Osborne George, whose debt reduction plans for repairing public finances are taking much longer. Despite this, the British Finance Ministry says that the public spending is under control.
IMPLICATIONS OF THE BRITISH ECONOMIC GLOOM
Britain is faced fresh economic gloom as there is a widening gap in the budget deficits. This implies that the government is issuing a huge amount of public finances to pay off the looming debts rather than investing into future developments (Stasavage, 2003). This shortfall leads to a weakening economy. These implications have dire effects on the following parties, British government, British domestic firms and multinational firms. (Rhode, 2005)
The figures published on the Reuters article reveal the government’s high borrowing rates for debts payment and how this slowly weakens the economy. Since it came into power the government made the reducing budget deficit plan its top priority. However, with an economy that is struggling, there is a slow economic growth and the debts are still high (Brown & Taylor, 2008). Chancellor Osborne’s debt reducing plan hit another blow when the August financial records revealed a 14 billion pound deficit.
The government is now faced with tough decisions on how to sustain the economy. The Chancellor is faced with the choice of cutting of national debt in the GDP or increasing taxes (Mulheirn, 2012). However, economists rule out that increase in taxes and more cuts will adversely further affect the British economy (Van, 2010).
There is pressure on the government with the aim of ensuring that the economy does not lapse into a double dipped recession. The huge borrowings may lead to a future economic failure and rise in the unemployment rates (Warr & Jackson, 2011). Due to this high national debt crisis British government has failed to reach its development targets that were tabled in the previous financial year. Osborne also received several warnings from rating companies saying that Britain would be stripped off its top-notch ranking if the situation would be not put under control. This would be embarrassing to the government which fought hard to be credit-worthy in comparison to other euro nations that are debt strapped.
BRITISH DOMESTIC FIRMS
The figures published in the Reuters article show that the economy is weak and the business sector is weakening with the oil and gas sector being the hardest hit. The shutdown of North Sea oil and gas production firm due to low profit growth is a reflection of the impacts of the weak economy. Inflation is slowly eating up most local firms (Solvin, Sushka & Lai, 2001). There is fear of further inflation rates growing in the next financial year. However, there are mixed reports on the implication of Britain’s weakening economy. Halford, a bicycle-car parts group firm recorded a 23% slump in its first half-year profits, it says that business is tough and growth is quite slow. In contrast, Arcadia, a clothing retail firm registered a 25% underlying profit on its flat full year sales.
The government is watching local firms closely especially the companies’ profits (Bennett, 2011). The finance minister argues that the public sector is improving though there are many challenges that the government has geared up to address. A weak economy will affect the domestic firms’ growth and performance; hence, the government is monitoring any upturns in the business sector. In terms of cash borrowings there has been a steady rise of an estimated 5 billion pounds from last year and this is good news to the domestic investors. In addition, the central bank stabilized the interest rates and this regulation will give local firms time to increase their performance (Sinsier, Osborn & Ocal, 2002).
In the past decades the influx of multinational companies in Britain has been on the rise. The flow is attributed to increased world trade services and policy initiatives that allow free trading across borders. Britain hosts a wide variety of Multinational Corporation. This has greatly led to a high infusion on investment capital, expert knowledge on different fields and entry of advanced technology into the British business sector.
However, Britain’s economy is in crisis and the implications are hard hitting the multinational corporations that have widely invested in the economy. The looming double dipped recession is sparking panic on foreign investors who could be adversely affected if the economy went into recession. This leads to a change in how these firms operate and their willingness to take risks in the British market scene (Zarha & George, 2002). Multinational corporations have tremendous amounts at stake especially US multinationals who have invested for a long time in this economy.
The weak economy could have several implications on its business sector and the entire economy in general, further pushing it into recession. Firstly, Britain will experience a huge pullout of investors from its business markets. This move will occur because many corporations will not be willing to bear the risks of the failing economy. Few multinational corporations may remain in the market but most foreign investors will seek to penetrate other fast-growing markets in the world. This will strip off Britain’s investment capital. Secondly, with a weak economy many multinational corporations will consider closing up due to overcapacity and poor profit growth. The demand for products is also low since many households are faced inflation (Cameron & Muellbauer, 2011).
In addition, the high rise in energy costs like gas and oil prices will lead to a terrible fall out of multinational firms. The high-energy costs discourage operation of these firms who opt for better business environment in other countries.
The article published in the Reuters newspaper has been the subject for discussion in this paper. The article reveals the looming economic crisis in Britain and its implication on the government, domestic firms and multinational corporations. An overly aggressive spending plan saw the British government increasing its borrowing rates and missing out its financial targets. In return, this has led to increased deficits and high national debts.
Despite the government debt-reduction strategies economists predict that Britain’s economy is about to hit another double dipped recession mark. This will have adverse impact on the domestic firms and multinational corporations. The local firms close up due to high operation costs and low product demand, while others are experiencing poor profit growth (Harman, 2007). In addiction, multinational corporations are forced to pull out from British markets due to high risks associated with the weak economy. Britain is said to be among the best business environment with many sophisticated buyers and a lot of innovation, however, with a weak economy the change is inevitable.