MOD3327 Economics For Management

MOD3327 Economics For Management Introduction 

This report indeed critically analyzed how the war in Ukraine has affected the macroeconomic objectives of the U.K., such as controlling inflation, stimulating economic growth, managing employment and unemployment and achieving the balance of payments of the U.K. Various data published by market research firms and the government of the U.K. have been used to reflect the current state of affairs in the U.K. pertaining to inflation, economic growth, unemployment and balance of payments. Specific reasons identified that resulted in an unfavourable situation for the U.K. economy related to the above-depicted aspect of the war in Ukraine have been adequately elaborated. Furthermore, three options have been proposed which would help a U.K.-based packaged food manufacturing organization deal with the impacts of the ongoing war in Ukraine. 

Part 1

Many reports published by Trading Economics (2022) show how the inflation level of the U.K. has increased from 5.5% in January 2022 to 6.2% in March 2022, just after the beginning of the war in Ukraine in February 2022. The inflation rate went straight upward since April 2022 in the U.K. and has remained above 9% since then. As mentioned by BBC.com (2022), the current inflation level of the U.K. is almost 40 years high. The data for inflation between December 2021 to November 2022, as published by market research firm Trading Economic dissertation has been presented below. 

Figure: Inflation Rate in the U.K. from December 2022 to November 2022

(Source: Trading Economics, 2022)

The rise in inflation is mainly due to the present ongoing Russia-Ukraine conflict, which has indeed driven the prices of crude oil and natural gas price. Crude oil is widely used to manufacture petroleum products such as petrol, gasoline and diesel and other petroleum derivate, which are commonly used in transportation and other plastic-based commodities. On the other hand, natural gas as a commodity has a wide array of applications in heating buildings, lighting and cooking and other industrial use. As per the data published by IEA (2022), Russia is the world's third-largest exporter of crude oil after the U.S. and Saudi Arabia, with almost 9.8 million barrels of crude oil production per day and 2nd largest producer of natural gas (Iea.org, 2022). Due to the invasion, there has been economic sanction imposed by the U.K., E.U. and USA, and Russia halted the supply of natural gas and cut its crude oil production, which led to an immense shortage of supply of natural gas and crude oil amid higher demand of these products globally after Covid-19 related lockdown has been eased down. 

A lower supply of crude oil and natural gas amid higher demand led to a massive increase in the price of crude oil after the Russia-Ukraine conflict to a considerable level. The crude oil prices increased fromUS$84.45 per barrel in January 2022 to reach a high of US$118 per barrel in March 2022 immediately after the war between Russia and Ukraine broke out (Trading Economics, 2022). Even natural gas prices have increased from US$3.99 per MMBtu during January 2022 to reach a high of US$ 7.84 per MMBtu in March 2022 after the war started at the end of February 2022 (Trading Economics, 2022). European countries largely depend on crude oil and natural gas imports from Russia. So there has been a cost-push inflation with higher energy products with the massive increase in energy products prices and other petroleum products which are directly manufactured from crude oil. 

Therefore, the Bank of England and the U.K. Government, which controls inflation with the regulation of monetary policy and spending decisions, respectively, have been facing enormous difficulties with a significant rise in commodities prices mainly driven by prices of natural gas and crude oil. The increase in energy prices due to the rise in crude oil and natural gas prices; the cost of production and prices of various commodities has been witnessing a massive surge and leading the way for high inflation. It is because people have to spend significantly more amount of money to purchase essential commodities, which indeed reflected in the high inflation rate has been witnessed in the U.K. economy, and government measures miserably failed to control the inflationary situation. 

Macro-Economic Objective: Simulating Economic Growth

As per the data published by market research firm Statista (2022), there has been a decline in the GDP growth rate since March 2022. It could be evident from the data that the GDP growth rate reduced from a 0% growth rate during March 2022 to a negative -0.5% growth rate during September 2022 as compared to the previous months (Statista.com, 2022). So, after the start of the Russia-Ukraine war in February 2022, the U.K. economy started witnessing no growth of a hostile growth rate regime. 

In order to substantiate the mentioned fact, the data of the monthly GDP growth rate from January 2020 to September 2022 has been depicted in the below-mentioned graphs. 

Figure: Monthly GDP growth rate of the U.K. economy from January 2020 to September 2022

(Source: Statista.com, 2022)

As per the opinion of Jolliffe and Prydz (2015), the high degree of inflation indeed leads to a reduced level of purchasing power among the people and therefore spending on essential commodities and reduces the expenditure of discretionary spending. This particular aspect certainly has a negative effect on various sectors and industries, and investments in assets by people tend to go down significantly with significantly reduced disposable income.

The war in Ukraine has led to an immense rise in energy prices, and this indeed led to a massive increase in the prices of various products leading to high inflation in the U.K. This indeed led the people of the U.K. to remain with lesser disposable income and many industries which depends on discretionary spending witnessed a decline in revenue (Orhan, 2022). This is absolutely evident from the data published by the Office for National Statistics that industries like information and communication, real estate activities, wholesales and retail trade, repairing of motors, arts and entertainment and professional scientific and technical activities spend on education, accommodation and food service has witnessed negative growth during September 2022 as compared to the previous month (ONS.gov.uk, 2022).

Figure: Growth rate in various sectors of the U.K. during September 2022

(Source: Office for National Statistics, 2022)

So this essentially slowed down the economy with lesser disposable income in the hands of the people, and as a result, three has been negative growth in the U.K. economy and the U.K. economy is almost stagnated at 0% GDP growth rate or facing negative growth rate in the last few months since March 2022. 

Therefore, with the rise in prices of crude oil and natural gas due to the lower supply of these commodities by Russia with economic sanctions faced by the nation for invading Ukraine has led to a significant price rise leading to lower disposable income to spend on discretionary items has led; the U.K. government failed to keep stimulating growth. On the other hand, with high inflation in the U.K. economy prevailing at 40 years increased, the Bank of England kept on pushing the bank rate high since the onset of the Russia-Ukraine conflict in February 2022 to control inflation by reducing the money supply. This is evident from the fact that the bank rate increased from 0.75% in March 2022 to 3% in October 2022 to reduce the money supply with the intention of controlling inflation (Bank of England, 2022). So the reduced money supply with a high bank rate also contributed to the slowdown in economic growth. As per the opinion of Ranaldo, Schaffnerand Vasilios (2021), monetary policy decisions pertaining to the interest rate is an essential tool in the hands of the central banks to control inflation but have a significant negative impact on economic growth. 

Figure: Bank Rate announced by Bank of England

(Source: Bank of England, 2022)

Macro-economic Objective: Managing Employment And Unemployment

The data published by Office for National Statistics (2022) has led to an observation that the unemployment rate has reduced from 3.7% during Q1 of 2022 to 3.6% during Quarter 3 of 2022. It could be evaluated that there has been a decline of 0.1% in the unemployment rate. The graphical presentation of the employment rate has been presented for the period between 2022 Q1 to 2022 Q3. 

Figure: unemployment data of the U.K. from Q1 2022 to Q3 2022.

(Source: Statista.com, 2022)

The main reason for the decline in the unemployment rate is because of the lesser consumer spending on various discretionary items and increased consumer spending on essential commodities with the rising inflation rate in the U.K. economy. The war in Ukraine has indeed led to massive price rises in important things as Russia curtailed supplies of crude oil and natural gas amid higher demand after easing the Covid-19-related restrictions. This indeed resulted in a higher price of energy and gas, which has undoubtedly contributed to higher commodity costs (Peersman, 2022). On the other hand, strict monetary policy by the Bank of England, such as reducing the bank rates to control inflation, led to a reduced money supply in the U.K. economy. So with rising bank rates, loans and borrowings became expensive, and therefore businesses in the U.K. started to take less amount of loans and postpone investment decisions (Bank of England, 2022). This is indeed having a direct impact on the employment generation leading to lesser employment generation. 

Moreover, the reduced discretionary spending in an inflationary situation resulted in many organizations cutting jobs. The extent of consumer spending has reduced from £358328 million during the second quarter of 2022 to only £347306 million during 3rd quarter of 2022 (Trading Economics, 2022). So the decline in consumer spending in the U.K., with cost-push inflation driven by high crude oil prices and natural gas prices, has led to a decrease in the unemployment rate by 0.1% during 3rd quarter of 2022 as compared to Q1 of 2022. 

Macro-economic Objective: Achieving The Balance Of Payments

As per the opinion of Kindleberger (2019), the balance of payment could be defined as the sum of all transactions of one country over a period of time. So it helps in determining the exports and imports of all goods and services for a specific time period. 

Currently, the U.K. has been facing a balance of payment problems with more imports than exports which has led the government of the U.K. to a troublesome situation. As per the data of the National Office for Statistics, the U.K.'s current account deficit has reduced to £33.8 billion during Quarter 2 of 2022 (Office for National Statistics, 2022). This is mainly because of the high import bill for crude oil and also refined petroleum products in the U.K., being one of the major importers of crude oil having fewer crude oil reserves. As per the data of Statista (2022), during October 2022, the U.K. as a nation imported £5334 million of oil and exported only £4079 million, leading to a balance deficit of £-1255 million (Statista.com 2022). So it could be analyzed that 4% of the total current account deficit is primarily due to the ongoing war between Russia and Ukraine, which indeed led to a significant rise in crude oil prices with Russia, a major crude oil producing nation, reduced supplies of crude oil amid sanction economic sanctions imposed by them by U.S., U.K. and other E.U. nation for their invasion in Ukraine. This indeed significantly resulted in an increased balance of payment deficit for the U.K. 

Moreover, there have been reduced supplies of sunflower oil with massive disruption in the supply chain as sunflower oil is majorly produced by Ukraine and Russia. With both of these countries engaged in war, there have been supply chain problems, and thus there is a significant shortage of edible sunflower oil in the U.K. The supply chain problems due to the ongoing war in Ukraine have led to a massive price rise in sunflower oil in the U.K. as the country has imported more than 3000000 tonnes of sunflower oil each year from 2018 to 2021(Statista. com, 2022). The price rise in edible sunflower oil with supply chain disruptions caused by the war also led to an increase in the import deficit with high prices of sunflower oil. Owing to the increase in the cost of producing energy due to the rise in the price of crude oil and natural gas, the cost of production and fees of numerous commodities have seen a significant increase, setting the stage for high inflation. It is because individuals must spend much more money to buy necessities, which is reflected in the high inflation rate that has been observed in the U.K. economy, and because government efforts to manage the inflationary situation utterly failed.

Part 2

The company is one of the packaged food manufacturers in the U.K.; the manager of the organization should adopt specific strategies which would help the organization to mitigate the impacts caused due to the war in Ukraine. In the below subsequent section; 3 different options have been proposed and evaluated, which would significantly help to deal with the impact of the war presented below. 

Option 1: Use Renewable Energies Such As Solar Power In Manufacturing Facilities Of A Packaged Food Manufacturing Organization

As per the opinion of Nemet (2019), investment in solar power technology as the source of electricity has led to massive improvements in technology in solar power generation, such as the development of high-quality Solar P.V. modules. It is imperative that the organization install a high-quality solar P.V. module, which would help in avoiding the usage of electricity generated from other non-renewable sources such as natural gas and coal. The prices of natural gas and coal have been increasing day by day, and with the Russia-Ukraine conflict, the cost of natural gas increased from US$3.99 per MMBtu in January 2022 to reach a high of US 7.84 per MMBtu during March 2022 (Trading Economics, 2022). By investing one time in solar electricity generation to run the machine and equipment and lighting arrangements of the production centres, the packaged food manufacturing organization could effectively save a significant amount of cost to a considerable extent in the long run. Therefore, it is of immense importance that there is a need to shift to renewable energies source to meet power needs. This shall not only help in reducing the cost of installation of highly efficient Solar P.V. modules but also protect the environment. Mu (2022) also mentioned that with investment in renewable sources of energy all around the world to search for alternate fuels, major oil and gas-producing economies around the globe are increasingly making cartels to keep the prices of crude oil and gas high for profit generation, and therefore their many economists believe that the trend of price increase for crude oil and gas would continue to grow. 

So Russia lowering the production amid economic sanctions imposed on them for their illogical invasion of Ukraine has led to a significant supply of crude oil and natural gas which is impacting the U.K. with high energy prices. As per the data published by trading Economics (2022), energy prices increased from £264 per megawatt hour to £ 544 per megawatt hour in November 2022 (Trading Economics, 2022). Here is information on UK electricity costs during the previous five years.

.Figure: Energy Price in the U.K. per megawatt hour (in GBP)

(Source: Trading Economics, 2022)

Even it could be observed that in the last five years, there has been ten times increase in electricity prices from £51 per megawatt hour in December 2017 to reach a high of £ 544 per megawatt hour in November 2022 (Statista.com, 2022). So, in essence, the prices of energy from various non-renewable sources have been increasing and therefore, it is imperative that the manager of the food manufacturing organization must resort to installing solar energy, which is present must more economical in the long run and hence would lower cost of production and ensure better profitability. 

Option 2: Transforming Its Logistics And Distribution Operations To Be Powered By Renewable Energy Sources

According to (Lu et al. 2017), the advent of advanced technology in portable high-efficiency batteries has resulted in new developments being made for introducing better-equipped and low-maintenance electric vehicles as a viable form of commute and logistics. Being a manufacturer of processed packaged food, the efficiency and cost-effectiveness of logistical operations are critical to sustained growth. Russia being a major crude oil-producing nation, is facing sanctions on crude oil production and export due to the ongoing Russia-Ukraine conflict. This is driving up crude and natural gas prices in the global supply chain as post-COVID demand for crude oil has increased and the sanctions have restricted supply (Norouzi, 2021). As per Trading Economics (2022) data, an increase of USD 33.55 per barrel of crude oil since January 2022 when the war broke out, which will continue to impact the profitability of the company as its logistics and distribution services are being run on traditional vehicles running on petrol derivatives whose prices are increasing drastically. 

It is recommended that the managers of the organization should switch their logistics and distribution operation to new-generation E.V.s to mitigate risks to the company associated with the Russia-Ukraine war situation. According to (Ahmad et al. 2017), while the initial investment into electric vehicles is more in comparison to traditional fuel vehicles, the return on investment from lower maintenance costs and running costs is indeed significant for this to be considered a viable long-term organizational strategy. With inflation being at a 40-year high in the U.K., utilizing the cost-saving potential of E.V.s will support the managers in reducing the impact of the Russia-Ukraine war on organizational profitability.

Additionally, since E.V.s require to be regularly charged for continued operability, it is suggested that the managers consider installing solar P.V. panels and modules that will generate sufficient electricity surplus to provide charge to the electric vehicles. According to Benton et al. (2022) majority of the U.K.'s electricity supply is natural gas-based, and the cost of energy has risen tremendously as natural gas prices have gone up by USD 3.85 per MMBtu in a span of only three months since the Russia-Ukraine conflict began. Hence, utilizing solar power to charge the E.V.s will reduce high electricity costs to the company over the long term and is a viable strategy to undertake, despite significant solar infrastructure costs at the initial phase. 

Option 3: To Stop Any Plans Of Business Expansion During The Present Time Period:

As per Mbah and Wasim (2022), the U.K. economy is facing a critical juncture due to issues of high inflation of over 9% in March 2022 since the Russia-Ukraine war broke out. This has reduced the purchasing power in the hands of people and organizations as they have to spend a lot more to purchase goods and services, in contrast to the earlier economic situation before the conflict. This has caused a cycle chain of events that is indicated in the low growth rate data of the U.K. The dire financial crisis can be gauged from the negative growth rate of -.5% that has been witnessed during September 2022 (Trading Economics, 2022). Under the such critical circumstance, the managers of the processed packaged food manufacturing company are advised to hold off any expansion plans of the company into new territory, marketing channels etc. 

The validation of this recommendation lies in the recent increase in the Bank of England's Bank Rate to 3% during October 2022, which essentially translates to higher interest rates to be paid by borrowers. This strategic move of the Bank of England, while aimed at controlling the money supply under inflationary conditions enhanced by the Russia-Ukraine war, will be a threat to any expansion plans of the company as it will have to pay much larger interests on the loans taken to fund its new channel or production-line expansion plans (Prohorovs, 2022). It is evident that this high-interest rate discourages borrowing and also impacts the growth of economic activity. The managers of the company need to maintain a balanced view of such macroeconomic variables that affect the overall profitability of the company and keep a check on even lucrative expansion opportunities, as the supply of cash and funds has indeed become costlier. 

Additionally, the fall in the consumer spending capacity in the U.K. by nearly £ 11,022 million by the 3rd quarter of 2022 is indeed concerning and reflective of the viability of business expansion in such a time when consumers are not making much discretionary spending (Office for National Statistics, U.K., 2022). It would be highly prudent for the managers of the food processing and distribution company to consider the purchasing power of its customers as well as a verifiable market requirement for new products and services, especially under an economic situation wherein there is a negative growth rate accompanied by high inflationary pressure caused by external factors like cross-border conflict between nations. 

Conclusion

The ongoing war in Ukraine has resulted in an enormous increase in crude oil and natural gas prices as Russia reduced suppliers of these energy products amid tough economic sanctions by the U.K., U.S. and E.U. nations. Russia is the world's 3rd largest producer of crude oil, and with economic sanctions against them, there has been a massive shortage supply of crude oil. This led to an uncontrollable inflation rate in the U.K. inflation with cost-push inflation, negative economic growth, a decline in employment and a deficit in the balance of payments. Furthermore, strategies like switching to using solar energy in a production facility, using the electric vehicle for distribution of packaged processed foods and decisions for not making any capacity expansion plan in the present high-interest regime of the U.K. 

References

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