| Year | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|
| Index of real GDP (2019 = 100) | 94.2 | 96.5 | 98.2 | 100.0 | 89.6 | 96.3 | 97.4 |
| Employment (millions) | 31.80 | 32.20 | 32.60 | 33.00 | 32.40 | 32.70 | 32.90 |
Following the sharp 10.4% contraction in real GDP in 2020, the recovery was short-lived. By 2022, the UK economy faced severe supply-side shocks, driven by escalating global energy prices and a structural contraction in the active labor force. The unemployment rate fell to historic lows, yet this reflected rising economic inactivity rather than dynamic job creation, causing acute labor shortages in hospitality, logistics, and agriculture.
Inflationary pressures intensified, with CPI inflation peaking at 9.1% in 2022. In response, the central bank aggressively raised its policy rate, making credit expensive for households and firms. This policy tightening cooled the housing market and discouraged business investment. Meanwhile, average weekly earnings grew by only 4.5%, representing a severe real-wage contraction that depressed consumer confidence and retail trade volumes, threatening to push the economy into a prolonged stagflationary phase.
Many macroeconomic analysts assert that the only viable long-term strategy for escape from low growth is to raise the trend rate of economic growth by focusing on productivity and labor force participation. Boosting productivity is critical to raising living standards without triggering self-defeating inflationary cycles.
However, relying on demand-side expansion during a supply-constrained period is highly risky, as it tends to fuel inflation and worsen the balance of payments. Instead, the government has championed supply-side initiatives, such as tax credits for advanced manufacturing, public funding for transport infrastructure, and reforms to encourage early retirees back into the workforce.
Yet, implementation is challenging. With corporate debt high and interest rates rising, private firms remain reluctant to undertake capital investment. While proponents suggest that direct public investment in green energy and skills must lead the way, critics caution that high public debt limits the fiscal space for such intervention without triggering higher borrowing costs.
Extract C states: "Many macroeconomic analysts assert that the only viable long-term strategy for escape from low growth is to raise the trend rate of economic growth by focusing on productivity and labor force participation."
Using the data and your economic knowledge, discuss the challenges that a government is likely to encounter when attempting to boost the trend rate of economic growth of an economy.
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.