Macroeconomic Analysis and Prediction for the UK: 2019-2023 Forecast

This economics report provides a comprehensive macroeconomic analysis and five-year forecast for the United Kingdom. The report begins with an introduction highlighting the importance of economic prediction and the key macroeconomic tools used by governments. It then delves into the background and history of the UK economy, emphasizing its market-oriented nature, global trade significance, and the dominance of the service sector. The report defines and explains the relevance of five key macroeconomic indicators: Real GDP per capita, growth rate of Real GDP per capita, inflation rate, unemployment rate, and interest rate. The core of the report presents a five-year forecast for these indicators from 2019 to 2023, including predicted values for each year and the five-year average. The forecast suggests a stable economic performance with improvements in real GDP per capita, moderate growth, low unemployment, stable inflation, and low interest rates. The report concludes by summarizing the key findings and referencing the data sources used for the analysis, including the Bank of England, Office for National Statistics, and World Bank. The report employs trend analysis, a verified method using historical data, to make its predictions.

Running head: ECONOMICS
Economics
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Table of Contents
Introduction......................................................................................................................................2
Background and History..................................................................................................................2
Definitions.......................................................................................................................................4
Real GDP per Capita...................................................................................................................4
Growth rate of Real GDP per Capita...........................................................................................4
The inflation rate (%)...................................................................................................................5
The unemployment rate (%)........................................................................................................5
Interest rate..................................................................................................................................6
Five Year Average Predictions........................................................................................................6
Explanation of Predictions...............................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
Predicting future is one of the import tasks for economists and policymakers. Policy
decision for future depends on correct prediction about major macro variables. There are few
major macroeconomic tools that government uses to analyze performance of an economy
(Oliver, 2019). The paper attempts to make prediction regarding some of the macro-economic
variables of United Kingdom. The selected macroeconomic indices for this purpose are Real
GDP per capita, Growth rate of Real GDP per Capita, Inflation Rate, Unemployment Rate and
Interest Rate. Each of these indicators has its significance to explain economic health of the
nation. The report first briefly discusses background of UK economy considering important facts
relevant for the economy. The second section gives definition of each of the selected
macroeconomic indicators and its implication for the economy. After discussing relevance of
each indicator, forecast has been made for next five years regarding likely performance of these
indicators.
Background and History
United Kingdom is known as a market oriented and highly developed nation. Going
internationally, the economy ranked sixth in world as per the measured gross domestic product.
The nation accounts nearly 3.3% of the world’s GDP. UK in 2016 was tenth largest exporters
and fifth largest imports of goods. Not only in terms of trade but also UK is interrelated to the
world economy with its inward and outward foreign direct investment. This has made UK one of
the most globalized nations in the world (Aliouche, 2015). The economy is dominated by the
service sector with the sector accounting 80 percent of nation’s GDP. The most important service
is financial service industry. London is considered as the second largest financial hub in the
world.

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UK during 18th century was the first nation to be industrialized and played a dominating
role in the world economy during 19th century. In 1870, UK accounted 9.1% of world’s GDP.
After that, the second industrial revolution took place in Germany and United State creating
several challenges for the economy. The economy however recovered all the challenges and
remains one of the powerful economies in the world in the twenty first century.
In 2018, nominal GDP of UK was $2.828 trillion. The PPP adjusted GDP during the
same time was $3.038 trillion. GDP growth of the economy in 2018 was 1.4 percent. Economic
growth however has slowed down to 1.2 percent in the second quarter of 2019. Per capita
nominal GDP in 2018 was recorded to be $42,580 in 2018 which is 20th in the world. Rate of
inflation is current recorded to be 1.8% compared to 2.5% in 2018. The last recorded
unemployment rate for UK is 3.8%.
In the second quarter of 2008, UK entered a recession originated from global financial
crisis. The economy was highly vulnerable to the crisis as it is highly dependent on its financial
sector. For boosting economic recovery from the crisis Bank of England adapted the strategy of
quantitative easing and lowered the interest rate to the lowest level of 0.5 percent (Obstfeld,
2016). It took several years for UK to recover the crisis with major challenge was coming from
increasing household debt. The economy again has again experienced an instability because of
its decision to leave European Union followed by the referendum in June 2016 (Bodenstein,
Guerrieri & LaBriola, 2019). Brexit has brought significant uncertainty for UK’s trade and
business activities hampering economic performance of the nation.

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Definitions
Real GDP per Capita
Real GDP per capita is defined as a measure of total value of economy’s output divided
by the total number of people living in the nation where value of total output is expressed in
inflation adjusted terms. This is a useful indicator for comparing living standard between two
different countries over time (Goodwin et al., 2015). Real GDP per capita is determined using
the following formula
Real GDP per capita= Real GDP
Population
Since real GDP per capita gives an estimates of average income it helps to understand
living standard of people in UK. An increasing per capita real GDP overtime indicates an
improvement in living standard. People can therefore afford a larger amount of goods and
services raising demand for goods and services. The movement of per capita real GDP therefore
is one crucial indicator for economic health.
Growth rate of Real GDP per Capita
Growth rate of Real GDP per capita measures changes in per capita GDP overtime. It is
the percentage rate of change in real GDP per capita from one year to the second (Uribe &
Schmitt-Grohe, 2017). Growth rate of per capita is determined using the following formula
Growth rate∈ per capita Real GDP= Per capita Real GDP∈current year −Per capita Real GDP∈previous year
P er capita Real GDP∈ previous year ×
An increase in per capita GDP is caused either due to increase in real GDP per capita or a
decline in population. When real GDP per capita grows at a faster rate than the population

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growth rate then people experience an increase in income boosting the living standard of the
nation.
The inflation rate (%)
Inflation rate is a measure of movement of average price level of the nation. It refers to
the phenomenon of sustained increase in price of goods and services in a nation. It is estimated
as a percentage change in consumer price index of the nation.
Inflation rate= CPI ∈current year −CPI ∈the previous year
CPI ∈the previous year ×100
Analyzing inflation is important in determining economic health as it influences
purchasing power of people by lowering value of money in real terms (Heathfield, 2017).
The unemployment rate (%)
Unemployment rate of a nation is defined as the percentage of workers who are
unemployed in the total labor force. Unemployment rate of a nation is computed using the
following formula
Unemployment rate= Number of unemployed persons
Total labor force ×100
In evaluating economic health of a nation unemployment rate policymakers closely
examine the unemployment trend since a higher unemployment rate adversely affects the
economy in terms a lower purchasing power for unemployed people (Agenor & Montiel, 2015).
UK overtime experienced a decline in unemployment rate. Projection of future unemployment
rate will help to predict economy’s output in future.
Interest rate

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Interest rate indicates the cost that investors have to bear for borrowing funds. In UK,
Bank of England determines the bank rate which influence all other interest rates in the
economy. Interest rate affects the economy through different channels. Lower interest rate means
a lower cost of borrowing which stimulates investment (Heijdra, 2017). Higher interest rate leads
to lower inflation expectation since people tend to buy more bank investment and bonds resulting
in a contraction of money supply.
Five Year Average Predictions
Table 1: Prediction of major macro variables
Variable/Year 2019 2020 2021 2022 2023 5-year
average
USD$ Real
GDP/Capita
43606.08 44117.89 44629.69 45141.50 45653.30 44629.69
Growth rate of
Real
GDP/Capita
2.45% 2.80% 3.14% 3.49% 3.83% 3.14%
Inflation Rate 1.28% 1.10% 0.92% 0.73% 0.55% 0.92%
Unemployment
Rate
3.71% 3.22% 2.73% 2.24% 1.74% 2.73%
Interest Rate 0.53% 0.54% 0.55% 0.55% 0.56% 0.55%

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Explanation of Predictions
The analysis of forecasted values of five selected economic indicators reveals that the
average real GDP per capita for the next five years expected to be $44629. The predicted average
for the next five years is greater than the average of past five years meaning UK economy will
going to experience an improvement in the living standard. The average growth rate in real GDP
per capita is expected to be 3.14 percent which will be supportive for economic progress in
future. Because of uncertainties arise from Brexit, UK economy has experienced a slow
economic growth. The condition however has improved because of a declining risk of no-deal
Brexit (gov.uk, 2019). This by lowering uncertainties among business and household support a
future growth. The average inflation rate for the next five years is predicted to be 0.92 percent.
The inflation rate is below the Central Bank’s targeted rate. The prediction supports the recent
inflation trend in UK. The forecasted average unemployment rate is 2.73 percent which is
considerably low. The low unemployment rate is expected to be supported by a stable inflation
and job growth (pwc.co.uk, 2019). Finally, the forecasted average interest rate for the next five
year is 0.55. Bank of England is expected to keep the inflation rate at a relatively low level to
support recovery of economic growth and price level.
The method of trend analysis has been used to make prediction about the chosen macro
variables. Trend analysis is a verified method for projecting future outcomes. In this method,
forecasting is using the historical data. In situation where accurate historical data are available,
this technique provides a reliable estimates (Haidar, 2016). For making prediction of next five
years, historical data are collected for past ten years from official website of Bank of England,
Office for National Statistics and World Bank. Since the forecasting is based on authentic data
and matches with current economic state, it gives a solid prediction for future.

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Conclusion
United Kingdom is one of the most developed nations of the world. This is a highly open
economy having a dominating share of service sector. The economy was heavily affected from
global financial crisis in 2008 because of its extreme reliance on financial sector. The economic
recovery was delayed because high level of household debt. After the Brexit referendum in 2016,
the economy undergone some uncertainties adversely affecting economic health. The paper
attempts to make future projection for five selected macroeconomic indicators. The selected
indicators are Real GDP per capita, Growth rate of Real GDP per Capita, Inflation Rate,
Unemployment Rate and Interest Rate. The prediction suggests the economy is expected to
constitute a stable economic performance in terms of an improved real GDP per capita, moderate
growth in real GDP per capita, low unemployment, stable inflation and low interest rate.

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References
Agenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University
Press.
Aliouche, E. H. (2015). The impact of the global financial crisis on country
attractiveness. Thunderbird International Business Review, 57(1), 63-83.
Bodenstein, M., Guerrieri, L., & LaBriola, J. (2019). Macroeconomic policy games. Journal of
Monetary Economics, 101, 64-81.
Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in
context. Routledge.
gov.uk (2019).Forecast for the UK economy: October 2019.GOV.UK. Retrieved 13 December
2019, from https://www.gov.uk/government/statistics/forecast-for-the-uk-economy-
october-2019
Haidar, A. D. (2016). Mathematical Methods—Statistics and Forecasting. In Construction
Program Management–Decision Making and Optimization Techniques (pp. 99-129).
Springer, Cham.
Heathfield, D. F. (Ed.). (2015). Topics in applied macroeconomics. Macmillan International
Higher Education.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Obstfeld, M. (2016). The initial economic impact of Brexit: an update to early December
2016. Brookings Papers on Economic Activity, 2016(2), 359-366.

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Oliver, M. J. (2019). Whatever Happened to Monetarism?: Economic Policy Making and Social
Learning in the United Kingdom Since 1979. Routledge.
pwc.co.uk (2019). UK Economic Outlook. PwC. Retrieved 13 December 2019, from
https://www.pwc.co.uk/services/economics-policy/insights/uk-economic-outlook.html
Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton University
Press.