Business environment assignment analyses the economic impacts of the war in Ukraine on the UK

Question

Task: For your business environment assignmentusing the circular flow of income, explain the main impacts of the ongoing war in Ukraine on the UK’s economy? Consider both the short-term and long-term economic impacts.Explain the economic system being used by the UK and why it is important for the government to occasionally intervene in the market.What economic recommendations if any can be provided to the government of UK to remedy any negative effects of the war in Ukraine on the UK’s economy What economic recommendations if any can be provided to the Central Bank of UK to remedy any negative effects of the war in Ukraine on the UK’s economy?

Answer

1. Introduction
The UK is generally considered one of the easiest and safest places for business in the globe, as the nation ranks among the highest position in the World Bank's Ease of doing business index. The liberal and flexible labour laws, robust market structure, and global standards in terms of corporate governance standardssignificantly support business in the UK. However, in recent days the economy of the UK is dramatically impacted by Russia’s invasion of Ukraine. Thus, the primary purpose of this business environment assignmentis to discuss and analyse the economic impacts of the war in Ukraine on the UK, and its current economic system. In concern to the severe economic impacts, the government of the UK initiated a major recommended economic response, which this business environment assignmentaims to address, along with its implications on the economy of the UK. Furthermore, the major response of the bank of England, along with its implications on the UK’s economy has also been discussed. The business environment assignmentculminates with a brief conclusion of the overall findings while providing recommendations to overcome the dramatic impacts on the UK's economy, caused by the invasion and other factors.

2. Discussion and Analysis in the business environment assignment
2.1. Economic Impact of the war in Ukraine on the UK
Irrespective of the relative strength of the UNK in terms of food security and energy, and its constrained connection to the supply chain concerning Ukraine, the international inflationary pressure created by the war has a significant impact on the economy of the UK. The potential economic impact of the war in Ukraine on the UK has been discussed below in the business environment assignment:

2.1.1. UK-Russia Trade discussed in the business environment assignment
Following the invasion of Russia on Ukraine there has been a dramatic change noticed in the trade between the UK and Russia, as the government of the UK declared a range of economic sanctions on trade with Russia following the war. The import of almost every commodity from Russia notably decreased, wherein the largest decline was noticed in the import of fuels, material manufacturers, and unspecified goods.

Figure 1: the decline of UK-Russia trade
Source: (Donnarumma, 2022)

There were no imports of fuel to the UK from Russia in June 2022, wherein the government of the UK stated that they plan to phase out imports of oil from Russia by the end of the year and culminate imports of liquidized natural gas from Russia thereafter (Donnarumma, 2022). Before the invasion, the UK was one of the largest importers of refined oil and crude oil from Russia. Therefore, it is found from the business environment assignmentthat the UK now needs to seek alternative suppliers for these fuels,or to produce adequate within the nation, wherein both actions are likely to cause a severe impact on the UK’s economy. In addition to this, the UK has also stopped their airspace to Russian flights, and in response to this Russia has stipulated payment for the energy in rubles, while introducing additional export licensing constraints (Guénette, Kenworthy and Wheeler, 2022).

2.1.2. Global Gas Price
The increase in the gas price globally has a significant impact on the economy of the UK because of the maximum utility of gas-fired power stations to generate energy and the optimum use of gas boilers for domestic purposes. Since the UK government aims to end importing and trading with Russia, it is found from the business environment assignmentthat the country has been looking for alternatives to tackle the issue. Since natural gas is a significant input in the production the capability of the economy is likely to shrink, as the longer full shut-off of Russian gas is likely to interrelate with the infrastructure bottlenecks for producing premium prices and major shortages in the UK (Di Bella et al., 2022).

2.1.3. Inflation
Irrespective of sanctions, the war between Ukraine and Russia has had a significant impact on the economy of the UK as the prices of oil doubled than the price a year ago. The “Office of Budget Responsibility (OBR)” forecasted inflation to reach 9% by the end of the year 2022 (Mendicino, 2022). As per the business environment assignmenthigh inflation and low growth are the primary effects of supply disruption to energy supplies, the uncertainty of financial markets etc. The market measures of inflation anticipations consistently increased in the current days, reflecting the concerns with the 2-year break-even rate rising above 4% after the invasion (Siddiqui, 2022).

Figure 2: Rising inflation n the UK
Source: (Siddiqui, 2022)

2.2. The UK’s Economic System
An economic system is an integral part where communities and governments organize and distribute the available resources, goods and services across the geographic region or country. As per the business environment assignmentthe various types of economic systems are traditional, centrally planned, market, command and mixed economic systems. Each economic system is based on sets of assumptions and conditions. In the UK the mixed economy system is used where some parts are managed by the government and the other parts are managed and controlled by private firms. A mixed economic system is a combination of both socialism and capitalism. It protects private property and provides some freedom to them in using capital and also allows governments to interfere in between to achieve social aims (Amadeo, 2021). As per the business environment assignmentfindings, there are various benefits of the mixed economic system that includes lesser economic inequalities, benefits in economic planning, freedom, encouragement to the private sector, most favourable use of the resources, economic growth and productivity. Furthermore, it allows for bringing change and transformation in the overall economic system which is beneficial for the country in generating economy and providing employment. However, there are limitations in the mixed economic system that includes it is unstable, inefficient planning, lack of efficiency, corruption and delay in making better decisions (Seth, 2014). As per the business environment assignmentthe mixed economic system is considered the golden child of economies and its objective is to address the issues in both social and capitalism and bring a new system which is better for the country. Therefore, this is one of the main reasons that the UK uses the mixed economic system for growing their economy and bringing growth and development to the country. The government plays a significant role in economic development in the country by bringing various strategies for the welfare of the society and community. The reason behind interfering in the economic system of the country is to reduce the monopoly system of one company and can have control over the market. The government interferences in the economic system to bring progress in society as the government takes care of society, and employment and reduces the monopoly of one company over the market. It is found in the business environment assignmentthat the government interferes in making efficient policies and regulations based on the situation and condition of the country and bringing improvement and growth to the nation (Moreira et al., 2016). Furthermore, the interference of government works in correcting the underlying problems of failure in the market with external costs, public goods and imperfect competition.

2.3 Major Recommended Economic Responses of the UK Government and their Implications discussed in the business environment assignment
2.3.1 Increase in Country’s Gas Production
The war in Ukraine brings about a challenge to the global economy by placing upward pressure on inflation when inflation is already through the roof and harming economic growth. As per the business environment assignment the Russian and Ukrainian economies are the chief suppliers of goods encompassing corn, wheat, palladium and titanium. With the continuous surge in gas and global oil prices, petrol prices in the UK have hit record heights. The Bank of England stated that inflation could rise more than 7% as the economy is still slow due to the conflict, however this surge in the inflation rate can make matters worse(Smith and Race, 2022). The UK has to utilise its own hydrocarbon states, Prime Minister Boris Johnson. The first gas licensing and North Sea Oil licensing round since 2020 is primarily due to the war as the government seeks to protect more national energy supplies in the wake of Russia invading Ukraine(Tank and Ospanova, 2022). As per the business environment assignment findings, the Prime Minister had further hoped that fossil-fuel organisations will be likely to amplify indigenous production as he formulates to publish an updated strategy for energy security. The exposure of the UK to volatile gas prices underlines the significance of the UK's plan to generate clean, cheap renewable energy sources.

2.3.3 Increment of Universal Credit discussed in the business environment assignment
Making a claim is one of the first steps that an individual must take to receive Universal Credit. Following making a claim, a claimant is considered as appearing on Universal Credit statistics when they agree to their commitment obligations and verify their identity. A weekly average of 29,000 individuals began Universal Credit from 15th October 2021 to 13th January 2022(Government of UK, 2022).

Figure 3: Universal Credit per month
Source:(Government of UK, 2022)

As per the business environment assignment data, further inflation has risen up to 10% in September of 2022 which is a 40-year high. It is not expected by the Bank of England that this rate of inflation will steep down until the mid of next year which means that when reimbursements upsurge in April 2023 it can even be higher. Some of the main benefits which are legally necessitated are PIP or personal independence payment, attendance allowance, disability living allowance, severe disablement allowance, incapacity benefit, carer's allowance, industrial injuries benefits, guardian’s allowance and additional state pension (Finnis, 2022). It is found from the business environment assignment research that the government of the nation has refused to rule out sparring this requirement as benefits such as universal credit do not have to legally upsurge in line with inflation. If it does to this degree, claimants will notice a 10.1% upsurge in their payments.

2.3.4 Reduction of National Insurance
It is found from the business environment assignment data that National Insurance surged by 1.25 pounds in April and then returned to its prior level in November. For workers that are under the pension age or earn less than 12,570 pounds per year, this step will make no difference since they do not have to pay national insurance(Reuben and Edgington, 2021). Higher earners have the benefit over lower income earners nevertheless higher earners will contribute more to the tax.

Figure 4: How much do employees have to pay
Source: (Reuben and Edgington, 2021)

Chancellor Rishi Sunak fell under immense pressure from business groups and MPs to rethink plans to amplify national insurance as fears upsurge that Russia's invasion of Ukraine will drastically worsen plunge the economy into stagnant inflation and worsen the cost of living(Helm, 2022). It has been proven in the business environment assignmentby history that big rises in gas and oil prices trigger stagnant inflation when economic output collapses and prices soar at the same time. The taxation must be reduced as a part of a targeted strategy to stimulate growth. The FSB has demanded an upsurge in special allowances which allows small employers to markdowns on their national insurance bills to counterbalance the impacts of the rise.

2.3.5 Increase Public Spending
Russia's invasion of Ukraine validated that substantial threats reside much closer to home and the UK must honour its NATO responsibilities in Europe and reverse a 9,500 decrease in the size of the British army by the year 2025. As per the business environment assignment it is crucial for ministers to respond to new threats to European and UK security similar to Labour the government did after the terror attacks of 9/11 with the biggest sustained upsurge in defence spending over the course of two decades(Sabbagh, 2022). It was reported by Coates (2022) that defence spending is the most probable of any budget to rise. Further additional cash for lethal aid for Ukraine and the likelihood of upsurge in other arenas of defence in the wake of amplified threat to NATO from Russia. The shadow defence security of labour is also expected to have a massive boost to the defence. As per the business environment assignment analysis this is primarily due to the threat that the nation has been receiving as the Russian invasion has blown away assumptions of the defence.

2.4. “Major response of the Bank of England and their implications to the UK’s Economy”
2.4.1. Increase Interest Rate
In order to overcome persistently high inflation because of Russia's invasion of Ukraine, the Bank of England has declared the biggest increase in its interest rate. On 21st September, the “Monetary Policy Committee (MPC)” of the Bank of England voted to increase the interest rate by 0.5% to 2.5% in order tomeet its 2% inflation target, while helping to sustain employment and economic growth (Bank of England, 2022a). it is found from the business environment assignmentthat since inflation was increasing rising, thus increasing the interest rate was one of the best alternatives in order to get inflation down. Though this is considered to be the best way to bring inflation down, however, their implication has a dramatic impact on the UK's economy, as the individuals having mortgages and loans experienced their cost repayment going up. On 3 November 2022, the Bank of England finally increased their rate of interest by 0.7%, which was consistently growing since last December from 0.1 to 3% (Bank of England, 2022b). The increase in interest rate as per the business environment assignmenthas made it more costly for individuals to borrow money or to save, thus having a dramatic impact on the overall UK economy.

Figure 5: Increasing Interest Rate
Source: (Bank of England, 2022)

2.4.2. Sustenance of Government Bonds
It is analysed from the business environment assignmentthat the Bank has been closely monitoring the financial markets, in concern about the significant repricing of the UK as well as international financial assets. The repricing of the financial assets of the UK has been more significant in recent days, which is primarily affecting the long-dated debt of the government. In concern to the objective of financial stability the bank of England aims towards restoring the market functioning while reducing risks from contagion to the credit conditions for the UK business and households. To accomplish this, the Bank is likely to carry out the provisional purchase of long-dated bonds of the UK government, so that the market conditions can be restored orderly while enhancing the economic condition of the UK as well (Bank of England, 2022c). it is analysed from the business environment assignmentthat in concern to the risk to the financial stability of the UK from dysfunction in the gilt market, the Financial Policy Committee of the Bank of England targets to purchase in the gilt market on the grounds of financial stability.

3. Conclusion
After the overall analysis, it can be said in the business environment assignmentthat the economy of the UK is severely impacted by the conflicts and war between Russia and Ukraine, following which the government of the UK declared major sanctions on trade with Russia. However, the mixed economy of the UK has helped to maintain the finical stability of the nation, the continuous rise in the inflation rate, mainly because of the war was a major concern for the UK. In order to overcome these impacts, it is found from the business environment assignment that the UK government took various responses, wherein the Bank of England also initiated certain actions, wherein both have a dramatic impact on the overall economy of the UK.

4. Recommendations
The UK is one of the strongest nations in terms of economy and population and is known for its growth and development. The country has various issues in policies which have disrupted the economy and have brought further additional issues to the nation. The UK follows a mixed economy and this brings issues in unstable market conditions and monopoly of the one company over the market. As per the business environment assignmentfindings, the universal credit issues, human rights and migration etc. are some of the challenges that are being faced by the country. Therefore, for bringing improvement and growth in the nation the country should work on developing effective strategies for improving the policies of the country and bringing change and transformation. It is recommended in the business environment assignmentthat the country has to work on making effective decisions for reducing the monopoly of one company over the market and enhancing human rights and migration issues and developing better policies for universal credit issues.

References
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