Data Response Exercise: Economy Performance of Persimmon PLC - Essay Example

?Data Response Exercise We can assess the performance of the economy through the use economic indicators like prices such as the interest rates and inflation rates and the quality in the life of the people as indicated by the unemployment rate and level of consumers’ confidence. These economic indicators are also used by the economists to assess the health of the economy as they track the economy’s long run course. Policymakers also used these indicators to formulate policies that will safeguard and improve the health of the economy (McConnell and Brue 2005, p112). Economists and business owners pay much attention to these indicators because any changes in these indicators will have effects on the economic environment and quality of life. Economic growth is one of the major goals in an economy because it lessens the burden of scarcity (McConnell and Brue 2005, p.132). If the total output of the economy increases, the wage rates and incomes also increases resulting to higher standards of living. This is due to the higher purchasing power given by the higher wages and incomes. People’s needs and wants and socioeconomic problems are better able to be met with the opportunities provided by higher wages and incomes. A growing economy can consume more at present times while the capacity to produce more in the future is also increased. But the in the long run, economic growth can be interrupted by periods of economic instability. This is possible because of declines in output or significant increases in unemployment or rapid inflation. Changes in the economic indicators affect all the individuals in the economy such as the consumers, producers and the government. The confidence level of the consumers varies as the performance of its economy changes. The decisions of the producers are affected by the spending behaviors of the consumers and the extent of regulation imposed by the government. The government has to consider both the welfare and expectations of the consumers and the same time the welfare and behaviors of the producers in the economy in making economic policies. Persimmon PLC is the holding company of the Persimmon Group of companies (the Group). The principal activity of the Group is house building, which is carried out within United Kingdom (www.corporateinformation.com 2011). Persimmon is one of the UK's leading house builders offering a wide choice of quality new homes in a large number of locations throughout the UK (www.persimmonhomes.com 2011). Persimmon PLC is one of the affected producers in the economy as they build quality homes to their customers. We all know that home is one of the basic necessities that a man should have to have a decent life. And the Group is with the government in achieving growth as its economic goal by helping the people build their homes as they perform their corporate responsibility. Over the years, the company’s business decisions are influenced by the changes in the activities of the consumers and the policies being implemented by the government in the economy. But records showed that they managed to performed well and continue gaining their customers’ satisfaction. In Table 1, Persimmon’s five year (2005-2009) performance was summarized. This contains some of the significant figures used to assess the financial position of the company. There were ups and downs in terms of revenue and sales during these five years but some figures move in one direction only. The average selling price continues to increase but profits and earnings are still trying to be recovered. The company’s return on capital employed is also at decreasing level. But the company has taken actions during 2008 to restructure their business to ensure that they remain strong and competitive. As a result, the business is well positioned both operationally and financially for a recovering market (www.persimmonhomes.com 2011) TABLE 1. FIVE YEAR SUMMARY (2005-2009) SOURCE: www.persimmonhomes.com All figures shown before goodwill amortisation/impairment where applicable * 2008 and 2009 figures stated before exceptional items † 2006 figures stated after reorganisation costs ? Average selling price calculated from nominal value of revenue (before fair value charge on shared equity sales) ** Stated after exceptional items We can relate the performance of Persimmon to the performance of our economy and see the factors that will link the two. Inflation is one aspect of macroeconomic instability because when inflation occurs, the purchasing power of money is reduced. Inflation tends to hurt some people, but can leave others unaffected and actually help others. If inflation is unanticipated, it can hurt the fixed-income receivers, savers and creditors while flexible-income receivers and debtors may escape inflation’s harm or get benefits from it. Inflation can also affect the economy’s output depending on its type or cause and severity. In the case of Persimmon PLC, the effect was seen through their volume of sales which was decreased each year and thus their revenue is also at decreasing rate. Another influencing factor to be considered is the interest rate. Interest rate can also affect the consumption level of the consumers and the level of business investment in the economy. Lower interest rates can motivate consumers to purchase something on credit and encourages business owners to borrow more capital for their investment. But higher interest rates may result to decrease consumption level and lower business investment level. The changes in interest rates may contribute to the changes in volume of sales and revenues earned by Persimmon PLC. These changes may have also affected their business decisions in setting the average selling price of their homes. In Table 2, the trend in the rise in general price level or inflation and interest rates are summarized. ECONOMIC INDICATOR 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 INFLATION 2.20 3.40 2.80 1.60 2.30 2.70 3.40 3.20 2.80 3.80 -.40 1.60 INTEREST RATE 5.50 6.00 6.00 4.00 3.75 4.75 4.50 5.00 5.50 2.00 .50 .50 TABLE 2. UK’S INFLATION AND INTEREST RATE (1999-2010) SOURCE: www.tradingeconomics.com To see the relationship between the inflation, interest rate and sales of Persimmon PLC, we could use Figure 1. The graph shows the trend in inflation, interest rates and unit sales (estimated in thousands) of Persimmon PLC for the years 2005-2009. The changes in the inflation and interest rates make the shifts in the curve of unit sales possible. FIGURE 1. UK’S INTEREST RATE, INFLATION AND UNIT SALES OF PERSIMMON PLC FOR YEARS 2005-2009 Major changes in the level of productivity in an economy are believed to be the cause of business cycles (McConnell and Brue 2005, 135). Business cycles have effects that everyone in the economy can feel and Persimmon is one of those firms most affected by it. Aside from inflation, unemployment is another problem that arises from business cycle that Persimmon has to face during those periods. Cyclical changes in the level of output and employment is also believed to be the cause of changes in the level of total spending. This is because in times that the level of productivity is low, business owners have to decide which cost can be cut and most of the time, they have to adjust the working hours or lay off some workers. The decrease in the workers disposable income can also decrease their spending which can result to lower sales for producers. Consumers’ expectations and confidence about the position of economy is also affected by these factors. In Table 3, the level of unemployment and consumers’ confidence in years 1999-2010 is summarized. We can see from it that as the level of unemployment rises, the level of consumers’ confidence falls up to negative values. This means that these are the times when the consumers refrain themselves from spending like buying a house resulting to decreased sales of Persimmon PLC. TABLE 3. UK’S LEVEL OF UNEMPLOYMENT AND LEVEL OF CONSUMERS’ CONFIDENCE (1999-2010) ECONOMIC INDICATOR 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 LEVEL OF UNEMPLOYMENT 6.02 5.532 5.106 5.198 5.044 4.782 4.792 5.4 5.395 5.551 7.453 7.876 LEVEL OF CONSUMERS’ CONFIDENCE 1.45 -.27 1.18 3.73 -4.36 -3.8 -2.55 -4.91 -6.27 -28.55 -25.18 -18.09 SOURCE: www.tradingeconomics.com It is shown in Table 3 that during those years (2004-2008), the level of unemployment is at increasing rate and the consumers are also losing confidence that the economy can recover from the situation. The effects of high level of unemployment and lower level of consumers’ confidence in Persimmon’s revenue, profits from operations and total shareholders’ equity are reflected in Figure 2. Reduced level of spending due to lower level of consumers’ confidence resulted to lower revenues and profit from operations. This can also make the downward shift of the curve for total shareholders’ equity. FIGURE 2. PERSIMMON’S REVENUE, PROFIT FROM OPERATIONS AND TOTAL SHAREHOLDERS’ EQUITY FOR YEARS 2004-2008 BIBLIOGRAPHY BBC. www.bbc.com. 1 January 2011. 13 January 2011 . —. www.bbc.com. 1 January 2011. 13 January 2011 . Index Mundi. United Kingdom unemployment Rate. 2010. 18 February 2011 . McConnell, Campbell and Stanley Brue. Macroeconomics: Principles, Problems and Policies. New York: McGraw-Hill Companies, Inc., 2005. Office for National Statistics . Economic Indicators. 16 February 2011. 18 February 2011 . TradingEconomics.com. Indicators for 232 Countries. 2011. 18 February 2011 . —. Indicators for 232 Countries. 2011. 18 February 2011 . —. Indicators for 232 Countries. 2011. 18 February 2011 . www.corporateinformation.com. CorporateInformationSnapShots. 2011. 18 February 2011 . www.persimmonhomes.com. Our Performance. 2011. 18 February 2011 . —. Welcome to Persimmon plc. 2011. 18 February 2011 . www.thisismoney.co.uk. "When will interest rates rise?" 18 February 2011. thisismoney.co.uk. 18 February 2011 . Read More