UK Gross Domestic Product
Bodie et al (2002), defines the macroeconomy as the environment in which all firms operate. According to Bodie et al (2002), based on a study on the S&P 500, stock price tends to rise with earnings per share. Although ones ability to forecast the macroeconomy environment can lead to speculative investment performance, it is not enough to forecast the macroeconomy well. (Bodie et al, 2002). It is important to forecast the environment better that competitors in order to make abnormal returns. (Bodie et al, 2002).
Some of the pertinent variables that need to be taken into consideration include: Gross Domestic Product (GDP), Inflation, Employment, Interest Rates, Budget Deficit and Sentiment The GDP is a measure of the economy’s total production of goods and services. (Bodie et al, 2002). A rapid growth in GDP reflects an indication of an expanding economy and provides enormous opportunities for firms to increase sales as well as profitability. (Bodie et al, 2002). Industrial production can also popularly used as a measure of an economy’s output.
However, using industrial production as a benchmark narrows the measure of economic activity to the manufacturing side of the economy rather than the economy as a whole. Like for the last quarter of 2006, the first quarter of 2007 witnessed a rise in GDP by 0. 7%. owing mainly to an increase in services. There has been a slight deceleration in this sector, offset by a strengthening in production and agriculture. (http://www. statistics. gov. uk/cci/nugget. asp? id=19).
Total production output remained constant in the first quarter of 2007, as opposed to a decrease of 0.2 per cent in the last quarter of 2006. While mining quarrying and energy supply witnessed an increase in output of 1. 4%, manufacturing witnessed a fall of 0. 3%. (http://www. statistics. gov. uk/cci/nugget. asp? id=19). Total services rose by 0. 8 per cent in the first quarter of 2007, as opposed to a rise of 0. 9 per cent fourth quarter of 2006. (http://www. statistics. gov. uk/cci/nugget. asp? id=19). The slight decrease in growth comes mainly from distribution, hotels and restaurants. Distribution, hotels and restaurants rose by 0. 6%, as opposed to a rise of 1. 2% in the fourth quarter of 2006.
The decrease in growth is mainly due to retailing. Transport, storage and communication witnessed an increase of 1. 7% as opposed to an increase of 1. 3% in the fourth quarter of 2006. (http://www. statistics. gov. uk/cci/nugget. asp? id=19). The acceleration in growth is mainly due to land transport. Business services and finance rose by 1. 1 per cent, compared with a rise of 1. 0 per cent in the previous quarter. The largest contribution to growth comes from other business services, which includes labour recruitment, architects and engineers and management consultants.
Government and other services rose by 0. 4 per cent, the same rate of growth as in the fourth quarter of 2006. Construction rose by 0. 8 per cent. The unemployment rate refers to the proportion of the total labour force that is yet to secure a job. (Bodie et al, 2002). It measures the extent to which the economy is operating at full capacity. (Bodie et al, 2002). Although the unemployment rate is a factor related to workers only, it can also be used to measure the strength of the economy for other factors of production. (Bodie et al, 2002).
Differences in employment rates within regions are greater than differences between regions. In the 12 months ending in September 2006, the greatest contrast between local authorities in employment rates was in the South West. Figures show a difference of over 30 percentage points between the lowest and highest employment rates in the South West. The lowest working-age employment rate in the South West is in West Somerset (56. 0 per cent), and the highest employment rate is in Cotswold, which has an employment rate of 86. 4 per cent.
Range of working age employment rates within English regions and GB countries, October 2005 to September 2006 The region with the narrowest spread of working-age employment rates is the North East, with 14. 6 percentage points between Durham (79. 4 per cent) and Easington (64. 8 per cent). The local authority with the highest employment rate in Great Britain is South Northamptonshire in the East Midlands with a rate of 90. 1 per cent, and the lowest employment rate in Great Britain is in the London borough of Tower Hamlets (52. 9 per cent).
In comparison, at regional level, there are just over 10 percentage points between the lowest working-age employment rate (68. 3 per cent), in London, and the highest working-age employment rate (78. 6 per cent), in the South East. (http://www. statistics. gov. uk/cci/nugget. asp? id=252). Inflation reflects the rate of increase in price levels. High inflation rates result from overheated economies, that is an economy in which the demand for goods and services is more than the production capacity resulting to upward pressure on prices.
(Bodie et al, 2002). For the year to March 2007, the consumer price index (CPI) in the UK rose by 3. 1%, up from 2. 8% in February 2007. (National Statistics, 2007). The all retail price index (RPI) on its part rose by 4. 8% up from 4. 6% in February and finally the all items price index excluding the mortgage interest payments index (RPIX) rose by 3. 9% up from 3. 7% in February. (National Statistics, 2007). See figure 4 and table 1 below.