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Why does economic growth matter?

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    Economic growth – fast, slow, or negative – is in the news more often than not. This guide explains what you need to know.

    What is economic growth?

    Economic growth – sometimes simply “growth” – typically refers to GDP growth. A country’s gross domestic product or GDP is a measure of the size and health of its economy. It is the total value of goods and services produced over a specific time period.

    An annual GDP growth rate of 3%, then, simply means that the economy has grown by 3% over the past year.

    Why is economic growth so important? Andy Haldane, the Bank of England’s Chief Economist, explains:

    As the video above explains, when GDP goes up, the economy is generally thought to be doing well.

    Meanwhile, weak growth signals that the economy is doing poorly. If GDP falls from one quarter to the next then growth is negative. This often brings with it falling incomes, lower consumption and job cuts. The economy is in recession when it has two consecutive quarters (i.e. six months) of negative growth.

    Following the global financial crisis that ignited in 2007, UK GDP fell by 6%. This marked the deepest recession for 80 years. As this guide discusses, the impact on people’s lives was severe with large falls in wages, restricted access to credit and many people losing their jobs.

    What’s the Bank of England’s role in economic growth?

    Bank of England, Threadneedle St

    The Bank of England has a remit to set interest rates (and other policies like quantitative easing) in order to keep inflation low and stable. Achieving this helps create the conditions needed for a healthy economy.

    Following the EU referendum, for example, we cut Bank Rate from 0.5% to 0.25% alongside other measures in order to stimulate the economy while helping us meet our target for inflation.

    And in fact, whenever we consider different possible policy actions (such as a change in interest rates), our remit requires us to pick whichever actions will boost economic growth the most while still meeting our primary objective for low and stable inflation.

    We also have responsibilities to ward off the chances of a financial crisis from happening. This also helps create the conditions for economic growth. And here, too, our remit explicitly requires us to factor in the impact on growth when deciding on policy actions that help to keep the financial system safe.

    What will GDP growth be this year and next?

    Growth in the economy matters for everyone – individuals, businesses, charities and the government. It feeds in to other spheres of life, too: experts in many fields, from healthcare to climate change, need to make assumptions about future economic growth.

    Every three months we forecast economic growth up to three years ahead. Our forecasts are published in our Inflation Report and feed into our decisions about interest rates.

    Find out more:

    • See our latest Inflation Report for the Bank of England’s assessment of GDP growth and forecasts for the three years ahead.

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