Why does economic growth matter?

Find out what it means when people talk about economic growth.
Economic growth – fast, slow, or negative – is in the news a lot. But what is it?

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:

Bank of England's KnowledgeBank guide on why economic growth matters.

  • When you hear about economic growth in the news, people often refer to this thing called GDP. GDP stands for gross domestic product and while that might sound complex, the concept is actually pretty simple. If you added it up the value of all the goods and all the services produced in a country, over a specific period of time - say a year, the result would be GDP. Or equivalently, if you added up all the incomes earned by people in a country over the course of the year that would be GDP too.  GDP is one way of measuring the size of a country's economy and judging whether that economy is growing over time. So the citizens of a country with high GDP are likely to have high incomes and high standards of living and if GDP goes up a lot, people are likely to be earning and spending more and businesses are likely to be hiring and investing more. In other words people are likely to be feeling better off. On the other hand if GDP growth is weak or perhaps even falling, companies are likely to be cutting jobs and people are likely to be earning and spending less, leaving them feeling worse off. Clearly GDP isn't all that matters in life. GDP doesn't measure a whole raft of things that improve our well-being, like spending time with our families or living in a clean and safe environment. None the less, economic growth still matters because sustained rises in GDP have been shown, over the course of history to improve our health our wealth and our happiness. So suppose we have an economy that grows at around two and a half percent a year, that's roughly what its historic average has been over the past 250 years. Now two and a half percent might not sound like a lot but at that rate when my children reach my age, the economy will be nearly three times bigger than it is today. My children's incomes will be nearly three times larger than mine. Einstein said that not all that can be counted counts and he was right, but economic growth can be counted and because of its role in boosting living standards, it really does count.
     

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. 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?

We set interest rates 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.

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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.

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