Using the data, explain two likely causes of the forecast of slower growth for the UK economy Examine two difficulties facing economists when forecasting economic growth

1. Economic Forecasts A Level
Macroeconomics

2. Economic Forecasts
• In March 2019, the OECD
downgraded its forecasts for most
of the world’s largest economies.
The OECD lowered its GDP growth
forecast for the UK in 2019 from
1.4% to 0.8%, assuming a
‘smooth’ Brexit. Eurozone GDP
growth forecasts for 2019 were
cut from 1.8% to 1.0%. (Source:
Parliament Research Briefings)
• Questions:
1. Using the data, explain two
likely causes of the forecast of
slower growth for the UK
economy
2. Examine two difficulties facing
economists when forecasting
economic growth

3. Using the data, explain two likely causes of the
forecast of slower growth for the UK economy
One likely cause of a forecast of slower
growth in the UK is due to continued
uncertainties about Brexit. John Maynard
Keynes argued that uncertainty can lead to a
worsening of animal spirits and therefore
cause a drop in planned investment spending.
Investment is a component of aggregate
demand and, if businesses are worried about
the likely future trade relationships with the
European Union, then some capital
investment projects might be scrapped or
postponed. This will then cause slower GDP
growth and may also lead to consumption
declining and household saving rising.

4. Using the data, explain two likely causes of the
forecast of slower growth for the UK economy
One likely cause of a forecast of slower
growth in the UK is due to continued
uncertainties about Brexit. John Maynard
Keynes argued that uncertainty can lead to a
worsening of animal spirits and therefore
cause a drop in planned investment spending.
Investment is a component of aggregate
demand and, if businesses are worried about
the likely future trade relationships with the
European Union, then some capital
investment projects might be scrapped or
postponed. This will then cause slower GDP
growth and may also lead to consumption
declining and household saving rising.
A second cause of weaker growth is that the
OECD has downgraded expected GDP growth
for other major countries. The extract says
that “Eurozone GDP growth forecasts for
2019 were cut from 1.8% to 1.0%.” Between
40-50% of all UK trade is done with the other
27 nations of the EU. If the EU economy slows
down, then UK firms may find it harder to sell
exports and this could lead to weaker export
sales and a contraction in output, profits and
investment in industries such as car
manufacturing. Germany is the biggest
economy in the EU and the OECD forecasts
growth for Germany in 2019 of just 0.8%

5. Examine two difficulties facing economists
when forecasting economic growth
One reason why forecasts are hard to make
accurate is that there are so many uncertain
variables affecting the economy. For example,
the growth forecast might be affected by
changes in the world prices of oil and gas and
other commodities. The UK economy is a net
importer of oil, so if world prices rise, then the
trade deficit will rise (since the value of imports
has risen) and it will also lead to a rise in inflation
which would have the effect of reducing real
incomes for households and profits for
businesses that use oil. However, many
businesses now hedge commodity prices in
futures markets to reduce uncertainty.

6. Examine two difficulties facing economists
when forecasting economic growth
One reason why forecasts are hard to make
accurate is that there are so many uncertain
variables affecting the economy. For example,
the growth forecast might be affected by
changes in the world prices of oil and gas and
other commodities. The UK economy is a net
importer of oil, so if world prices rise, then the
trade deficit will rise (since the value of imports
has risen) and it will also lead to a rise in inflation
which would have the effect of reducing real
incomes for households and profits for
businesses that use oil. However, many
businesses now hedge commodity prices in
futures markets to reduce uncertainty.
A second reason why all forecasts are subject to
margins of error is because of uncertainty about
policy. Forecasts might be based on the predicted
path of interest rates. The central bank might to
decide to start raising rates sooner than forecast
which would impact on industries such as
construction. Higher interest rates could also
lead to an appreciation of the exchange rate
which would then affect forecasts for export
sales. A counter argument is that many
households have fixed rate mortgages, which
reduces the impact of changes in interest rates.
Knowledge of this might make it easier to model
the effects of changes in monetary policy on a
country’s economic growth.

7. Examine two difficulties facing economists
when forecasting economic growth
Economic modelling has improved especially with the vast increase in data
available often in real time about consumer and business behaviour
including the use of online searches to help assess changes in sentiment. But
economics will always be a social science which means we can never be
certain about the likely behaviour of agents in any economy.

8. Economic Forecasts A Level
Macroeconomics