MACROECONOMIC ANALYSIS

Macroeconomic Analysis

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Macroeconomic Analysis

Introduction

The UK has been experiencing imbalances in their macroeconomic conditions over the past few years. These imbalances deserve policy actions and monitoring. To be more specific, the progress in the field of household debts, related with the increased intensity of mortgage debts, and the housing market characteristics, together with the unfavourable developments in international competition, specifically weak productivity growth and goods exports, persist to attract attention and debate.

To be more elaborated, the UK economy is experiencing growth. Yet, this growth is brought in largely by household consumption and is an adjunct to an increasing deficit in current account. Net exports and business investment is yet to increase from their initial low level. To help limit vulnerability and medium-term risks towards the rising borrowing costs, the government must contain high indebtedness together with minimising the impact on growth and investment. The risks found in the housing sector relate to the lesser supply of houses; the relatively weak capability of supply to meet up to the level of quantity demanded is the key reason for the increased price of houses and indebtedness of household mortgages. The reducing share in the export sector is indicating a short term risk, but together with the deficit in current account, there emerges structural challenges.

Macroeconomic Situation

Growth and Inflation

In UK, growth increased to 1.8% in 2013 as compared to 2012 where it increased to 0.3%. For 2014, it is anticipated to be increased to a further 2.5%. The growth that is experienced by UK has shown that UK has performed better than the euro zone area, which 2013 was -0.4%, the biggest market of export for UK. Nevertheless, this growth has been dominated mostly through the demand of households together with an increase in the deficit of current account. Domestic demand had a say of 1.6 pps. in growth during 2013. This was for the most part driven by an increase in the consumption of individuals whereas net export contributed to some extent to growth by 0.1pps (European Commission, 2014). A more better and large recovery and growth is yet enviable in which both net exports and business investment have a positive say in.

Following the global economic crisis from 2008, the economic recovery and growth had been weak until 2013, as mentioned above. Although there was an increase in growth of 1.8%, the economy remains below the peak of pre-crisis period by 1.4% (European Commission, 2014).

Inflation in UK has a downwards trend since September 2011. In September 2011, it was calculated to peak at 5.2%. In October 2012, inflation was recorded at 2.7%, whereas in January 2014 it reduced further to 1.9%. This recent decline in the inflation rates can be reasoned to the decrease in price of oil, an increase in the cost of education by an amount that is lesser than what had been predicted, and deferred increases in utility charge increases. For the future , it is expected that the inflation rate would be remain at the ...