Financial Economics Report: Global Economic and Investment Analysis

This financial economics report provides a comprehensive analysis of global economic prospects, with a specific focus on emerging and established markets. It examines key economic indicators such as GDP and inflation rates in countries like the USA, UK, India, and China, highlighting their respective growth trajectories. The report further delves into the impact of oil price movements on the UK's economic outlook, discussing how fluctuations in commodity prices signal global economic trends. It analyzes the relationship between inflation and interest rates, assessing their effects on the UK's business environment. Additionally, the report explores the influence of foreign exchange rates on the world and the UK's economy. Finally, it identifies specific sectors and companies suitable for investment, providing a well-rounded perspective on financial markets and investment strategies.

FINANCIAL ECONOMICS

TABLE OF CONTENTS
INTRODUCTION....................................................................................................................... 3
(1)Economic growth prospect of emerging markets and established markets...............................3
Oil price movement and how it might impact on UK’s economic outlook...............................6
Commodities price movement and how it might signal the world and the UK’s economic
outlook..................................................................................................................................... 8
Inflation and interest rate movement and its effect on UK’s business and economic outlook. . .9
Foreign Exchange rates movement and its impact on the world and UK’s economic outlook 16
2 Sector in which investment will be made for next 3 years.......................................................20
3 Company selected for portfolio and other elements that will be included in it.........................21
CONCLUSION.......................................................................................................................... 23
REFERENCES.......................................................................................................................... 24

INTRODUCTION
Economics is the one of the important domain that have impact on the business firms and
nation. In the current report emerging growth prospects of developed and developing nations is
evaluated and in this regard some of the statistics like GDP and inflation rate are taken in to
account. These figures for developed and developing nations are analyzed and economic
condition of developed and developing nations is identified. Apart from this, in middle part of
the report oil price movement and its impact on UK economy is evaluated. Detailed study of
commodity market is done in proper manner in respect to global economy and UK. Relationship
between interest rate and inflation rate is discussed in detail and UK outlook for future is
estimated in respect to same. Foreign exchange rate and its impact on the world is analyzed in
terms of positive and negative sides of increase or decrease in values of major currencies on
trade at global level. At end of the report, specific sector that will be selected for investment
purpose are identified and company within that sector in which investment must be made is also
ascertained.
(1)Economic growth prospect of emerging markets and established markets
Economic growth prospect is one of the important factor that need to be taken in to
account while selecting any company or sector for investment purpose. In terms of economic
growth nations are classified in to three categories namely developed, developing and
underdeveloped nations. In developed nations some of the countries can be taken like USA, UK,
Germany, Canada, France and Italy. In developing nations category nations that comes are India,
Philippines, Afghanistan and Bangladesh etc. In order to understand economic growth prospects
GDP of developed and developing nations need to be analysed.
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Figure 1GDP growth rate of nations
(Source: Real GDP growth, 2017)
It can be observed that GDP growth rate of USA is 2.2% and same of UK is 1.7% followed by
GDP of 2% is of Germany. Apart from this, in case of other developed nations like Canada,
France and Italy GDP growth rate is 3%, 1.6% and 1.5%. This reveal that growth rate in case of
these nations is very slow and developed economies are struggling to accelerate and maintain
current growth rate. As it can be seen that 2008 crisis hardly hit global economies. Government
of developed nations make use of quantitative easing programs to bring economy back on track
but still these nations are facing lots of problems in bringing stability in their growth rate (Real
GDP growth, 2017).
In order to understand global economic outlook along with developed nations it is very
important to understand economic prospects of developing nations. In case of India GDP growth
rate is 6.7% which is slightly lower than same of China by just one point. GDP of Afghanistan is
2.5% and same is 6.6% in case of Philippines. Apart from this, in case of Bangladesh GDP is
7.1% which is higher than two major fast growing economies India and China. Nepal is another
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nation whose GDP grow at 7.5%. All these things reflects that developing nations are in much
better condition than developed nations.
It can be said that in developing nations growth prospects are very high because they
have some core competencies on developed countries like cheap labour and production as well
as high quality and large market where demand is on peak. Such kind of factors are attracting
investment in developing countries and lead to acceleration in their growth rate.
Figure 2Inflation rate of nations
(Source: Inflation rate and average consumer prices, 2017)
Inflation rate in case of USA is 2.1% and same in UK is 2.6%. In case of Canada inflation is
only 1.6%. For France and Italy inflation rate is 1.2% and same is 1.4%. All these things reflect
that in developed nation’s inflation rate is in control but low inflation rate cannot be always
considered good for any nation. This is because if inflation rate declined then in that case
situation of deflation may come in existence which may heavily affect nation economy. Apart
from this, if inflation rate remain low then firms earning remain in specific range. Hence, it can
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be said that developed nations are receiving advantage of low inflation rate but same also may
create problems for them.
In case of developing nations like India inflation rate is 3.8% and same is 3.1% in case of
Philippines. Apart from this, for Bangladesh inflation rate is 5.7% and same in case of Nepal is
4.5%. Afghanistan have very high inflation rate of 6%. Thus, clearly difference can be observed
in case of developed nations and developing countries’ economies. It can be seen that inflation
rate is high in these nations which to some extent can be considers good but if inflation rate
further increase in these nations then same will not be good for them (Inflation rate and average
consumer prices, 2017). Hence, it can be said that both developed and developing nations are
facing problem of inflation rate and there must be stability in rate.
It can be said that growth prospects are bright in case of developing countries and in
future also this growth rate may accelerate and can benefit relevant nations. However, curbing of
inflation rate is very important because same have direct impact on growth rate of the nations.
This is because if inflation rate is not in control then in that case price of the products and
services will increase and this will lead to lower demand in the market. This results in decline in
production in the nation and this will lead to decline in growth rate of the nation.
Oil price movement and how it might impact on UK’s economic outlook
On analysis of price movement of crude oil lots of hidden factors can be identified.
Interesting that identified is that 2 to 3 years earlier crude oil price skyrocketed in the market but
from 2014 to 2015 these prices declined sharply at fast pace. However, now trend get changed
and crude oil prices again start rising from Q1 of 2016 (Metcalfe and Miles, 2012). However,
this growth rate is not so high and it can be said that percentage growth in inflation rate is in
control. Oil price movement have impact on the UK economic outlook. It can be observed that
significant oil price decline that was observed in 2014 positively affect UK economy as it can be
seen that due to price decline some of the sectors like agriculture, air transport, coke, refined
petroleum and manufacturing sector positively affected. In these sectors growth rate accelerated
which reflect that oil price decline lead to increase in UK economic activity. However, UK oil
and gas sector to some extent negatively affected by decline in oil price. As due to reduction in
oil prices relevant firms earn low profit in their business. However, in current time period oil
prices are increasing consistently which may have negative impact on the nation economy. This
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is because with increase in price of crude oil directly transportation cost increases which lead to
direct increase in price of commodity in the market (Balta-Ozkan and Baldwin, 2013). This lead
to decline in price of product in the market. Ultimately, GDP growth rate get reduced in the
nation. Thus, it can be said that decline in oil price have impact on UK economic outlook. It is
very important for UK to purchase oil a low price from the market so that building of pressure
on economy can be prevented. In this regard countries like India that enter in to contract with
any other nation for purchase of crude oil at cheaper price UK can also follow same strategy. It
can enter in to special contract with any oil producing nation with which it have friendly
relations. By doing so it can support its economy and can prevent jerks that can be observed in
same due to rise in oil price. Due to increase in oil prices real household income also declined in
the UK which is one of the major matter of concern. Consumption of crude oil cannot be
reduced significantly and due to this reason in order to increase savings people make low amount
of expenditure and this directly hit profitability of business firms (Ward and Rhodes, 2014). In
single line it can be said that increase in cost will lead to decline in expenditure from people side
and earning of less profit by the business firms. Hence, in current time period oil prices are
increasing and if same trend remain continue then in that case UK economy may derailed from
growth track as already there is low GDP growth rate of the nation which is not good for it.
In future time period it is possible that oil price decline because China economy is facing
problems and EU nations are struggling for accelerating growth rate. If China and EU nations
failed to grow at fast rate their economy then slowdown can come in these nations and this thing
may affect growth rate of GDP of entire globe. All these things will result in slowdown in global
economy and decline in demand of crude oil which will ultimately result in decline in oil prices.
Thus, it can be said that in future UK economy may grow at faster rate. There are higher chances
of happening of this situation because currently global economic condition is not so good and
same will have impact on China as it is one of major importer and exporter of several
commodities across globe. If economic growth rate will decline across globe then demand for
China exports will decline sharply and this may lead to decline in economic growth rate of China
(Williams and Martinez, 2014). This will ultimately lead to decline in oil price and same will
benefit UK economy to great extent. Hence, it can be said that in future oil prices are not
expected to grow at sharp rate and it may decline to some extent which will surely lead to strong
economic growth of UK. It can be said that outlook on UK economic growth is positive.
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Commodities price movement and how it might signal the world and the UK’s economic outlook
Commodity prices reflects value at which specific commodity is trading on commodity
market. In every nation there are exchanges where trading is done on commodity exchange.
Commodity price have significant impact on the global economy and it mirror the direction in
which economy is moving around. For example in base metal category varied items comes like
copper, aluminium, zinc and lead etc. All these items are used more or less in construction
industry. Thus, on weekly basis construction related data of UK and China are released and on
the basis of available facts investors make an estimation of likely economic condition of the
nation and on that basis decide whether to hold security or it must be sold in the market. Thus, it
can be said that price movement give a signal to the world. This is because investors on the basis
of information received on research report decide or prepare their investment strategy. Thus,
slight change which may be increase or decrease in commodity price signal the world whether
global or domestic economy is on growing or declining stage (Fankhauser, 2013). It must be
noted that USA and China are two major countries that are larger importer and exporter of base
metals. Thus, if demand of base metals get changed then it means that major global economies
are either in good condition or their economy is not on growth track. For example crude oil price
decline consistently reflect that global production of mentioned commodity is increasing but
there is lack of demand of crude oil in the market due to sluggish growth in the business across
two major global economies which are USA and China. Hence, if consistently crude oil price
will decline then it will means that condition of these two above mentioned nations is not good
and in this way commodity price movement reflect whether global economic is on growth track
or not. In China housing activities are increasing consistently and due to this reason it is assumed
that demand of base metals will increase in near future. Apart from this, many of mines get close
in China and due to this reason supply of base metals will decline in upcoming time and this will
lead to increase in price of base metals in the mentioned market. Thus, imports of base metals
will increase in upcoming time period and this will lead to increase in price of same in relevant
exchange. LME or London metal exchange is one of the main exchange that have heavy impact
on price of base metals. Due to price increase in China investors in UK will be motivated and
they will make more investment in base metals in LME which will lead to increase in its price in
UK (Sundbo and SËrensen, 2013). Hence, it can be said that UK economic outlook is positive as
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with improvement in China economic condition trade will increase across the globe which will
benefit UK. Thus, it can be said that outlook on UK economy is positive.
Hence, it can be said that UK outlook is positive in terms of commodity market but
future trends entirely depends on the condition of economy of USA and China because they are
major exporter and importer of base metals. Apart from this, gold prices are heavily affected by
USA market. In USA investment in gold and silver is considered as safe heaven and when price
of stocks decline consistently investors make an investment in gold and price of yellow metal get
increased in the market. Hence, it can be said that price in UK for yellow metal to large extent
are heavily affected by investors sentiments that are in USA. Thus, UK economic outlook is
positive and it is affected by number of factors.
Inflation and interest rate movement and its effect on UK’s business and economic outlook
Inflation rate and interest rate are interlinked to each other as it can be observed that with
change in interest rate inflation rate also get changed. It can be observed that when central bank
increase inflation rate interest rate get changed significantly. There is close relationship between
inflation rate and interest rate. When inflation skyrocketed the interest rate also get changed.
This is because by making interest rate higher an attempt is made to control inflation to great
extent. For example it can be seen that if inflation rate is high in the economy as supply is low
but demand is high in the market then in that situation inflation rate get increased. Similarly, if
inflation rate is low then in that case people are making large amount of purchase (Downey. and
Mihelj, 2012). Thus, in order to control slow growth of inflation interest rate is reduced and by
doing so inflation rate is being controlled to great extent. It can be said that inflation and interest
rate both are closely related to each other. This is proved from the fact that with change in
inflation rate interest rate also changed significantly. Interest rate change is the one of the
important part of monetary policy of any nation and time to time it is reviewed and changed
consistently by central bank of the nation so as to bring stability in the nation economy. It can be
said that interest rate is the one of the most important tool that any nation have in order to deal
with inflation related problem. In UK also on quarterly basis inflation rate is changed by central
bank.
In the current period of hyper-globalization, there are significant evidences available for
global inflationary cycles as a result of intensifying globalization which leads to promote
common shocks via trade channels and commodities. Inflation can be defined as the rate at
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which prices of goods and services supplying in the economy is rising and consequently results
in lowering purchasing power. In every country, central bank works for controlling high rate of
inflation and protect economy from possible deflation through monetary policies. Inflation and
interest rate are closely related to each other. It is because, when central bank aims to control
inflation for stabilizing prices, they increase long-term interest rates on loan using contractionary
policy which controls the circulation of money in the economy or vice-versa. Central bank also
used open market operations to control monetary circulation through buying treasury bills. There
are many reasons of interest such as rapid increase in demand than productive capacity, high
increase in prices of material, wages cost, transportation and others.
Under the contractionary policy, when bank charges high rate of interest to control the
quantity of money available in the economy to control growing inflation leads to increase cost of
borrowing, bond yields, mortgages and cost of living as well. However, inflation is not always
have damaging impact on the economy, because, when it is controllable at acceptable level, it
help economy to prosper with increased employment, availability of enough money to purchase
products and services. Low rate of inflation help countries to recover from depression or
recession by boosting consumer spending, consumption and less borrowing cost. However, on
the other side, banks may be reluctant to supply loan to the users due to less return. Volatility in
prices of elementary products i.e. food, clothing, housing, education, healthcare also affects
consumer price index (CPI) due to decline in real purchasing power of the currency. Real estate
industry increases with the rising CPI, in contrast, fixed income instruments like certificate of
deposits or treasuries lose their value because yield on such do not increase with the increasing
inflation rate.
After the Great economic crisis in 2008 as a result of bubble peaked in real estate,
dropping house prices and sub-prime mortgage, Federal Reserve had made unprecedented
interventions in their monetary system to recover the economy. Currently, US had low inflation
rate, in which, central bank continuously monitor the economy and change their monetary base
(circulation currency + reserves kept by commercial banks). In US, in 1995 the rate was 9%
dropped to 6% in following decade. Such decelerating policy was accompanied by economic
slowdown due to inflation. As a result, its CPI in 1995 rose to 3.5% which came to 2.5% in 2005
(What’s causing America’s low inflation, 2015). In 2015, its monetary base reported to 17.8% at
a CPI growth of only 1.9%. It is because, when bank increase reserves, then they keep
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themselves more money which means they can make more loans which boost consumer
spending, employment, effective utilization of capacity and upward movement in price and
wages. Afterwards in 2010, coming of Pay interest on excess reserves allowed Fed to purchase
mortgage backed securities and bonds that declined interest rate resultant stock market growth,
recovery of home prices and wealthy customer spending level. Now, the CPI is slightly less
against preceding year due to decline in energy and other gasoline product prices at an inflation
rate of around 2% - 4%. Evidencing it, CPI for energy goods dropped by 19%, conversely, food
prices goes up by 1.8%. It also appreciated dollar value resultant less import cost that pressurizes
domestic firms to decrease their prices. US inflation also affected labor market with the decline
in unemployment rate by 5.1% at higher wages rate.
Figure 3 UK GDP growth rate
(Source: UK economy at a glance, 2017)
Now, coming to UK, with the steady performance, British economy become the second
fastest growing among in G7 countries. Currently, the country noticed a Quarter on Quarter
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(QOQ) GDP growth of 0.4%. Service sector progressed significantly however, construction and
manufacturing companied struggled. Before EU refendum, there was a fear because it was
predicted that vote to Brexit will result in economic recession resultant decline in pound value,
however, after the six month, country showed immense progress.
Figure 4 Inflation rate in United Kingdom
(Source: United Kingdom Inflation Rate, 2017)
Country has low inflation rate of 3% which is highest in the last 5 year and slightly
below the expected inflation of 3.1%. In the corporate sector, housing and utility sector prices
grown up from 2.1% to 2.3%, food and non-alcoholic beverages from 3% to 4%, culture and
recreation from 2.5% to 2.8% and health sector from 2.4% to 3.4%. In contrast, prices remains
steady for hotels, restaurants at 3.1%, tobacco and alcoholic beverages at 4.3%, clothing and
footwear at 3.2%, furniture, maintenance and equipments at 3.1%, communication at 1.7%,
miscellaneous services at 0.9% and education at 2.8%. Inflation @ 3% affects spending power
negatively whilst it is beneficial for pensioners due to increased pension payments.
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