CHAPTER TWO ECONOMIC OUTLOOK Contents

Chapter 2: Economic Outlook7

CHAPTERTWO: ECONOMIC OUTLOOK

Contents

2.0 Introduction 3

2.1 Global Economic Outlook 3

2.2 Economy of the United Kingdom 6

2.21 GDP 6

2.22 Inflation 7

2.23 Interest Rates 8

2.24 Unemployment Rates 8

2.25 Exchange Rates 9

2.3 UK Telecoms Industry 10

2.4 Summary 11

References List 13

Appendix 1: Global Economic Indicators by Country 15

2.0Introduction

Thischapter undertakes a detailed analysis of economic indicators at theglobal level and country level (United Kingdom) with an overridingaim of assessing the investment environment in the past five yearsand the future prospects resulting therein. In this regard, keyeconomic indicators including gross domestic product (GDP), inflationrate, interest rates, unemployment level and exchange rates will beanalyzed for trend and magnitude implication.

2.1Global Economic Outlook

Thegeneral economic outlook has been promising in the past five years.The period covered by this report (2011 to 2015) did not experienceany significant setback as far as global financial crises areconcerned. This has been reflected in positive outcomes as signifiedby global economic indicators. The following discussion will evaluatethe key global indicators with an overriding objective to ascertainthe investment environment in the past five years and the prospectsthe period offers.

Theglobal GDP recorded a consistent growth through the period, despitesome regions of the world experiencing economic difficulties. In2011, the global GDP was $72,187.94 billion, the lowest recorded inthe period. In 2012, the world GDP increased to $73,475.28 beforeincreasing slightly to $75,470.92 in 2013. The GDP rose to its peakin the period to $77,301.96 in 2014 (UK Economic Outlook,http://cdn.budgetresponsibility.independent.gov.uk/July-2015-EFO-234224.pdf,accessed on August 15, 2015). The projected world GDP for 2015 is$74,551.03, which is relatively low, and this could be attributed topolitical instability in the Middle East that has greatly affectedoil prices and the economic contractions experienced earlier on inthe year. The figure below presents the global GDP between 2010 and2015. Note that 2010 is included to illustrate the increasing trend.

Figure2.10:Global GDP

Adoptedfrom: Trading Economics, http://www.tradingeconomics.com/,accessed on August 15, 2015

TheWorldInflation Ratefor the period between 2011 and 2015 have also displayed a consistentdownward trend that is a positive signal for investors the worldover. The rates of world inflation have fallen from 5.2% in 2011 to3.2% in 2015. It is important to observe the magnitudes with whichthe inflation rates have been falling to take into account the latesttrends. In 2012, the global inflation rate was 4.24% having droppedby 0.96% from the previous year. In 2013, the inflation rate droppedfurther by 0.32% to 3.92%. The downward trend continued to 3.45% andultimately to 3.2% in 2014 and 2015 respectively (UK EconomicOutlook,http://cdn.budgetresponsibility.independent.gov.uk/July-2015-EFO-234224.pdf,accessed on August 15, 2015). The figure below summarizes theseobservations in global inflation rates.

Figure2.11:World Inflation Rates

Adoptedfrom: Trading Economics, http://www.tradingeconomics.com/,accessed on August 15, 2015

Itis important at this point to examine other important globalindicators which influence investment decisions. Due to the abstractand subjective nature of some indicators, they will be evaluatedbased on the latest figures in specific countries which shape theworld economy in certain disciplines of the economy. The unemploymentratesremained low. In 2015, the United States recorded the lowestunemployment rates in the “advanced economies” at 5.30%. EuroArea recorded 11.10%, 4.04% for China and 4.20 for United ArabEmirates (Trading Economics, http://www.tradingeconomics.com/,accessed on August 15, 2015). Globalinterest ratesshowed a regional pattern in which Europe and the Americas manifestedlower interest rates. In 2015, United States recorded interest ratesat 0.10%, Euro Area recorded 0.05%, China 4.85% and Japan 3.40%. Theexchangerateswithin this period showed a considerable variability and were moremeaningful when viewed from a country perspective which has been donefor the United Kingdom in the following section. See appendix 1 forinformation relating to global interest rates, unemployment rates andexchange rates. In general, the global economic outlook paints amore positive prospect as far as investments are concerned.Nevertheless, in investment analysis, it is important to undertake aspecific regional and country analysis to take into account thesituational factors at play (Guerard,(2013):Hu &amp Li (2015): Reily &amp Brown (2011)).

2.2Economy of the United Kingdom

UnitedKingdom is the second largest economy in Europe measured by nominalGDP and the ninth largest in the world as measured by the purchasingpower parity (World Bank,http://data.worldbank.org/data-catalog/GDP-ranking-table,accessed August 15, 2015). Moreover, the UK economy has experiencedconsistent growth and prosperity in the past few years, albeit withtaking a few downturns due to global financial crises. This sectionprovides an analysis of the UK economy by analyzing key macroeconomicindicators such as GDP, Inflation rates, interest rates, unemploymentlevels and exchange rates between 2011 and 2015 to determine theeconomies attractiveness to investments.

2.21GDP

TheUK growth rate has been consistent for the past five years dipping anall-time low in 2013. However, the economy has recorded an increasingtrend, growing by 0.88%, 2.41% and 9.97% in 2012, 2013 and 2014respectively. The prospects for 2015 are as much promising. Thefigure below shows the trends of GDP growth in the UK between 2011and 2015.

Figure2.2: UK GDP Growth Rate (2011-2015)

Adoptedfrom: Trading Economics, http://www.tradingeconomics.com/,accessed on August 15, 2015

2.22Inflation

Therates of inflation usually determine the rate of asset valuation andreturns of investments in an economy (Santacreu,2014: Barro, 2013).A lower rate of inflation is often desirable to investors as itsignals a desirable return to investments. The UK inflation rateshave been falling consistently in the past five years. In 2011, theinflation rate was 4.5% before falling to 2.8% in 2012 marking a 1.7%decrease. In 2013, the inflation rate was 2.5% and fell further to1.5% in 2014 the lowest in the five years since the inflation ratefor 2015b has been projected to 1.6% (Trading Economics, http://www.tradingeconomics.com/united-kingdom/indicators,accessed on August 15, 2015). The graph below shows the inflationrates in the UK between 2011 and 2015.

Figure2.3 Inflation rates in the UK

Adoptedfrom: Trading Economics, http://www.tradingeconomics.com/,accessed on August 15, 2015

2.23Interest Rates

TheUK interest rate is the surest of all the economic indicators coveredby this report. For the past five years, the interest rates haveconsistently assumed a constant figure at 0.5%. This makes theeconomy predictable as far as lending and business projection isconcerned. Many investors will find this indicator, particularlyattractive since predictability of business proceeds depends more onprevailing and future interest rates than any other economic factor(Bodie, 2014: Anderson &amp Liu, 2013).

2.24Unemployment Rates

Justlike the inflation rates, another economic indicator that has shown aconsistent drop in the five years covered by the survey is the rateof unemployment. In 2011, the rate of unemployment was 8.1%, fallingslightly to 7.9% in 2012. The rates were 7.6%, 6.2% and 5.6% in 2013,2014 and 2015 respectively (Trading Economics, http://www.tradingeconomics.com/united-kingdom/indicators,accessed on August 15, 2015). The figure below shows the trend inunemployment rates in the UK.

Figure2.4:Unemployment rates in the UK between 2011 and 2015

Adoptedfrom: Trading Economicshttp://www.tradingeconomics.com/united-kingdom/inflation-cpiaccessed on August 15, 2015

2.25Exchange Rates

Forforeign investors, this will be a crucial macroeconomic determinantand a relatively stable exchange rate would be desirable. The UKexchange rates have been relatively attractive, as they haveexhibited much less volatility in the past few years especially for acomplete year. This implies that the economy will favor foreigncapital and therefore investors. Figure 2.5 below shows the UKexchange rate for the past five years.

Figure2.5: UK Exchange Rates

Adoptedfrom: Trading Economics,http://www.tradingeconomics.com/united-kingdom/currencyaccessed on August 15, 2015

2.3UK Telecoms Industry

TheTelecoms industry in the UK is currently faced by several regulationsseeking to condition a more integrated telecoms market across the EU,which has caused a stir in the industry both in the disguise ofopportunities and challenges (http://www.theguardian.com/business/2014/nov/30/merger-fever-uk-telecoms-industry-bt-ee-o2,accessed on August 16 2015). This comes at a time when Britain’sfragmented communication industry is faced by convergence. The mosttalked about is the acquisition of O2by BT and the ongoing talks between BT and EE. The revenues in theindustry have been falling consistently in the past few years asevidenced in the figure below.

Figure2.30:Revenues in the UK Telecommunications Industry (2007-2014)

Adoptedfrom: Trading Economics, http://www.tradingeconomics.com/,accessed on August 15, 2015

Nevertheless,Vodafone, which is the subject of this report has the brightestfuture prospects of the four leading UK Telecoms industry as it ispoised to use the fiber it acquired UK network built by Cable &ampWireless (KPMG Report,http://www.kpmg.com/uk/en/industry/communications/pages/default.aspx,accessed on August 16 2015).

2.4Summary

Insummary, this chapter has undertaken a detailed analysis of economicindicators at the global level and country level (United Kingdom)with an overriding aim of assessing the investment environment in thepast five years and the future prospects resulting therein. In thisregard, the economic indicators assessed in this chapter haveespoused the United Kingdom as an investment attraction in the pastfive years. Moreover, the fact the unemployment rate, inflation rateand interest rates have been falling during this period offers mostpositive prospects for already existing investors. In the last fiveyears, the exchange rates have been relatively less volatile in anincreasing GDP further endearing the UK to investors.

ReferencesList

Anderson,R., &amp Liu, Y. (2013). How low can you go? Negative interest ratesand investors’ flight to safety. TheRegional Economist,(Jan).

Barro,R. J. (2013). Inflation and economic growth. Annalsof economics and finance,14(1),121-144.

Bodie,Z., Kane, A., &amp Marcus, A. J. (2014). Investments.

Guerard,J. (2013). Introductionto financial forecasting in investment analysis.Springer Science &amp Business Media.

Hu,D., Schwabe, G., &amp Li, X. (2015). Systemic risk management andinvestment analysis with financial network analytics: researchopportunities and challenges. FinancialInnovation,1(1),1-9.

IMFWorld Economic Outlook. Accessed on August 15, 2015 at5.16pm&lthttp://www.imf.org/external/pubs/ft/weo/2015/01/&gt

Reilly,F., &amp Brown, K. (2011). Investmentanalysis and portfolio management.Cengage Learning.

Santacreu,A. M. (2014). Reaction functions in a small open economy: What rolefor non-traded inflation? FederalReserve Bank of St. Louis Working Paper Series,(2014-044).KPMGReporthttp://www.kpmg.com/uk/en/industry/communications/pages/default.aspx,accessed on August 16 2015.

UKEconomic Outlook,http://cdn.budgetresponsibility.independent.gov.uk/July-2015-EFO-234224.pdf,accessed on August 15, 2015

UKOffice of National Statistics. Accessedon August 15, 2015 at5.16pmhttp://www.ons.gov.uk/ons/datasets-and-tables/index.html

TheGuardian.http://www.theguardian.com/business/2014/nov/30/merger-fever-uk-telecoms-industry-bt-ee-o2,accessedon August 16 2015

WorldBank, http://data.worldbank.org/data-catalog/GDP-ranking-table,accessed August 15, 2015

Appendix1: Global Economic Indicators by Country