The Performance of the UK Economy and Economic Performance of the Euro Area - Essay Example

Macro-economic Indicators of Economic Growth and Inflation

Macro-economics is a branch of economics which explores the behaviour of the aggregate economy at a given time. It involves examination of phenomena such as inflation, the price of various goods and services, national income, and employment. When referring to macro-economic indicators, the exact statistics that can be used to establish the current position of the economy are considered. Regular publications by the government, done quarterly or annually are used to evaluate the state of the economy at a given time. Fiscal and monetary policies made are based on understanding of the macro-economic indicators. In summary, it is impossible to formulate any policy if the macro-economic indicators are not clear on the state of the economy by considering issues such as inflation, recession, rate of unemployment, and labour market. When considering regions such as the European Union, there are about 23 million small and medium-sized enterprises which translate to about 99% of all companies and which employ about 75 million people (Bekeris, 2012). Therefore, to ensure that they are running, and hence impact on the national economy, internal and external factors have to be considered.

In this section the performance of the UK economy in the last two years will be evaluated. Main macro-economic indicators include interest rates, consumer price index, GDP, employment/unemployment, payments made from abroad and those made to outside countries, and monetary and fiscal policies formulated by the government to address changes in the indicators. Measures of inflation and prices include consumer price inflation, iproducer price inflation and house price index (Office for National Statistics UK, 2015a). Balance of payments which refers to the difference between the money sent abroad and the one received is important in establishing total foreign trade operations. In a situation where it is not regulated, it can adversely affect the local currency mainly leading to inflation due to the increased liquid money in the economy and the increased ability to purchase goods and services. The increased demand is a catalysing factor to inflation. Fiscal and monetary policy aim at realizing least unemployment (it cannot realize a null factor since there must be a significant value in the labour market), reduce inflation and ensure that the money received from abroad does not affect the local currency adversely. While monetary policy mainly deals with the financial market, fiscal policy mainly targets taxes and expenditures. For instance, in a situation where there is excess money in the market leading to inflation, the government can facilitate an increase in interest rates that banks offer, or sell government bonds to citizens at an interest. This will reduce the money and hence address the effects of inflation.

While considering employment as a macroeconomic indicator, it is used to establish how an economy is functioning. In a situation where unemployment rates are high, it translates that there is unutilized labour that can be put into use and realize a better GDP. The total market value of all goods and services produced in a country. However, there are other key factors that need to be considered to ensure a higher GDP. A good example is the financial system. In the United Kingdom, the financial system is large and has rapidly grown in the recently decades calling for good understanding of its structure to help in formulation of policies (Burrows & Low, 2015). Inflation is measured in a number of ways. Consumer price index (CPI) is the most common measure used. The unit used (market basket) of goods represents most common goods and that the consumers use. The prices are recorded over time to evaluate any changes. Therefore when checking the inflation rate for a given year such as 2015;-

Inflation rate (2015) = CPI (2015)- CPI (2014)/CPI (2014) x 100

However, limitations such as CPI’s failure to adjust to changes in quality should be handled before concluding that there is inflation. The last indicator, interest rates can be considered the most important factor in determining the situation in the foreign exchange market. Flows of investment in a given region such as UK are determined by interest rates. Considering that currencies are used to evaluate the economy of a given country, when there are significant differences in interest rates, the relative worth of currencies compared can be affected. This explains the reason behind formation of economic blocs such as the European Union where some of the countries use a similar currency (Euro). In situations such as Greece where the economy is struggling, remaining in an economic bloc and/or using a similar currency with other countries can be dangerous since it is not possible to devalue the currency and hence help save the struggling economy.

The UK Economy in the Last Two Years

In the third quarter of 2015, the UK economy grew by 0.5% which was a lower value compared to the value recorded in the previous quarter (Office of National Statistics GB, 2015b). Since mid-2013, there has been a sharp decrease in unemployment rates in the country which translates to effective use of the available labour in the UK (Office of National Statistics GB, 2015b). Wages have increased in 2015 with a value slightly higher than 2% being recorded. CPI which is used to measure inflation rates in the country reflected a -0.1% drop which was highly attributed to the reduced pressure in common goods and services (Office of National Statistics GB, 2015b). In the third quarter of 2015 financial year, gross domestic product grew by 0.5% which was 0.2% slower than the one recorded in the previous quarter. Comparing the results in 2014 where in the same quarter 2.4% was recorded, a 0.1% drop was recorded. The figure below from the office of the national statistics can be used to understand how GDP has been in the previous years.

Output by industry; constant prices, seasonally adjusted Q1 2008=100. (Office of the National Statistics GB, 2015a).

Unemployment rate by duration, present UK (Office of the National Statistics GB, 2015a)

Sterling exchange rates 2007=100 UK (Office of the National Statistics GB, 2015a)

Comparing the performance of UK to other countries in the Euro region, the growth of the economy by 0.5% in the last quarter of 2014 is a positive indicator of a recovery after a period of poor performance (Retail Economics UK, 2015). In the year 2014, the output in the country was 2.6% which was the fastest growth in all the G7 economy. The UK labour market has recovered from the recession that affected it significantly from 2008. In 2014, unemployment fell to the lowest value recorded in six years standing at 5.8%. The UK economy is closely integrated with the rest of the world through its trade of goods and services (Chowla, Quaglleti & Rachel, 2014). The pound is also a renowned currency in many parts of the world being used to establish whether other currencies are appreciating in value or not. Therefore to measure macro-economic uncertainty such as the effects of the recession in 2008 new indices ought to be used (Sekhposyan, 2015). Understanding the trends in a given economy helps to predict possible solutions. Macro-economic indicators especially inflation, GDP, and rate of unemployment are important to policy makers (Mugge, 2015). Much of the recovery that has been recorded in the United Kingdom, reducing unemployment rates to 5.8% in 2014 which is a six year low have been successful due to the predictability of the economic trends.

Macro-economic indicators such as interest rates affect the foreign exchange market and the revenues collected by financial institutions directly (Kyereboah-Coleman & Agyire-Tettey, 2008). The Eurozone economy advanced 0.3% in the last quarter of 2015 which was the same as in the previous quarter (Trading Economics, 2016). Household spending was reported to have gone down. With an all-time high of 1.20% in 1997, a similar trend may be in sight with most countries reporting appreciating values in 2014 and 2015. Therefore, the UK economy is growing faster than that of other Eurozone countries. This can be attributed to the policy measures put in place after the recent recession which threatened the economy with unemployment rates going up, financial institutions struggling and inflation rates going up.

How Government Policies could Influence the Macro-Economy in Terms of Economic Growth and Inflation

Economics is the science of how commodities are distributed under conditions of scarcity (Varoufakis, 2002). The activities of a government in formulating fiscal and monetary policies is based on aggregate demand which describes or represents the total demand for goods and services in a given economy. Therefore, fiscal and monetary policy affect aggregate demand in different ways. While focusing on fiscal policy, government spending and taxation are altered to change the way consumers spend their money. For instance, in a situation where there is excess money in the economy prompting inflation, increased taxation can reduce the money and in the same time increase government revenues. The trends in government spending have direct impact on employment and household income. If the government wants to influence money supply in the economy, it will use monetary policy. Understanding macroeconomic concepts is needed to make these approaches (Gillespie, 2007). Therefore, fiscal policy will influence government spending and taxation while monetary policy will influence interest rates and inflation. When interest rates are influenced, the trend in saving and household consumption will be affected. Expansionary fiscal policy is applied when the economy is in recession while contractionary fiscal policy is used in opposite situations. The government should therefore evaluate the indicators discussed in the first section to evaluate which policy to enact.