Macro-Economic Issues Essay Example | Topics and Well Written Essays - 2000 words

Macro-Economic Issues - Essay Example The impact would stem around profitability, efficiency, risks and leverage. At first a brief overview of the UK economy for FY 10, 11, 12 would be given and would then be followed by the effects on Imperial tobacco. Then a speculation would be made as to how Imperial tobacco would respond to these macroeconomic changes based on strategy and corporate objectives of Imperial tobacco. The growth of the UK economy seems sluggish in the aftermath of the financial crisis. The crisis had hit the UK from both eastern and western borders. This includes the housing market crash of US and the Euro Zone Debt crisis. Between 2008 and 2010, the GDP growth rate has been negative (Trading Economics, 2012) and the rate after 2010, although positive, has not been satisfactory. There is also a fear of double dip recession since the second quarter of FY 12 has experienced a GDP growth rate of -0.2 % (BBC News, 2012), the production sector has also experienced a decline of 1.4% , followed by a fall in co nstruction output of 0.5 % and compensation of employees by 0.3%. Now coming to the fiscal statistics, the National debt to GDP ratio stands at 80 %, the budget deficit has been reduced and increased VAT yield show signs of fiscal tightening. Interest rates are an all time low and despite of this bank lending to small businesses is falling. Low interest rates and increasing current account deficits are also putting pressure on the British Pound. A falling pound would hurt distributors country wide since import costs would rise as they would have to pay more in terms of the domestic currency. Unemployment hovers around 8.4 % and no signs of improvement are expected. Consumer confidence shows no signs of improvement despite yearly increases in current expenditure (The Economist, 2012). In addition to, UK has seen some major structural changes over the years, of which the most notable is the ageing population. Ageing population refers to a rise in the average age of the population of a country over time. So it is unlikely that the market for UK would continue to grow. In addition to, this has the impact of increasing wage levels across the economy as Labor supply reduces in the long run. Apart from these macroeconomic issues, the tobacco industry has been subjected to severe regulatory policies around the world which include: Increased duties year on year Ban on cigarette advertising Ban on smoking in public places Allegations of illicit trade Plans to introduce plain packaging All these regulations tend to have a negative impact on tobacco industry, with the exception of the levying of excise duties which would be discussed later on. Imperial tobacco seems to be quite resistant to macroeconomic changes. The risks that currently pose threat to Imperial tobacco plc are interest rate risks and exchange rate risks. Interest rate risks accommodate the financing and profitability of the company since Imperial Group plc has a high Debt to Equity ratio and raises a larg e amount of capital from debt capital and Bank loan markets. Now if the bank fail to meet their obligations of refinancing the debt then it would definitely limit the ability to capitalize on global opportunities and mitigate threats. Movement in interest rates can also affect the credit rating of Imperial tobacco and reduce its profitability because of increased finance costs.To reduce these risks Imperial employs various hedging strategies and has invested some of