GDP data and forecast uncertainty

As most readers of this blog will have seen, the ONS today published its preliminary estimate of UK GDP growth in the July-September quarter: 1.5% year on year, and 0.4% quarter on quarter.

With the caveat that the figure may be revised up or down in subsequent releases, this reading is broadly in line with growth of 0.3% quarter on quarter in both the January-March and the April-June periods. The “preliminary” tag and the need for subsequent releases is because this first estimate is based only partly on hard data, and partly (in fact, more than half) on early survey responses.

real GDPAlthough the latest figures are still subject to some uncertainty, what seems clear is that broadly speaking, the economy hasn’t shown much growth momentum since 2014-15:

Today’s figures demonstrate the extent to which economics is actually about interpretation. The preliminary growth reading could be viewed positively, when compared against expectations; negatively, considering that it makes Q3 the seventh consecutive quarter in which annual growth has been below the long-term average rate of 2%; or neutrally, in light of the fact that the growth rate is similar to the Q2 reading, and that, at a very broad level, the UK’s economic performance appears to be not as weak as expected but not as strong as it could be.

If today’s data are ambiguous about the current state of the economy, what they indicate about future prospects is even less certain. Economic forecasting—indeed, any forecasting!—is replete with uncertainty even at the best of times, and these are not the best of times as far as projecting the future is concerned. In the UK economic space, this is because the number and nature of the assumptions that underpin any forecasts are quite unprecedented as the UK continues negotiations to exit the EU. The extent of this dilemma is reflected in the language that many official forecasters are using to caveat their projections. For example:

…there is no meaningful basis for predicting the precise end point of the [Brexit] negotiations as a basis for our forecast. There is also considerable uncertainty about the economic and fiscal implications of different outcomes, even if they could be predicted. 

– Office for Budget Responsibility, March 2017

The medium-term growth outlook [in the UK] is highly uncertain and will depend in part on the new economic relationship with the EU and the extent of the increase in barriers to trade, migration, and cross-border financial activity.

– IMF, October 2017

With that major caveat, the chart below shows various forecasts for the UK and also, for comparison, for the US and Europe.


Real GDP growth forecastsThe noticeable variation in expectations for the UK economy reflects this uncertainty and the fundamentally unknowable (at this stage) medium-term nature of the UK-EU relationship. For the international comparisons, IMF forecasts provide a baseline.

Perhaps the most interesting line on this chart is the green one, which plots calculations TheCityUK undertook using IMF data to derive forecast growth rates for the EU27—in other words, the EU excluding the UK. We did our own calculations because official EU27 forecasts don’t exist, since that country grouping does not exist. Of course, by the time the UK exits the EU, one would expect these growth forecasts to have been revised, possibly quite significantly. But the exercise still yields some insight into expectations of growth profiles at this point in time.

The result is somewhat intuitive—in the near term, the Eurozone and the broader EU27 groupings are both set to outperform the UK (at least on the metric of GDP growth, which is a relatively crude one, though that’s a discussion for a separate post…). Assuming the UK economy stages a recovery from 2019—a big assumption given the extent of policy uncertainty—UK growth is expected to remain below its long-term average and to be roughly on par with EU27 growth. Overall EU27 growth is buoyed by prospects in high-growth economies, notably in Poland, which is both fast-growing and relatively large. But since we used a weighted average in our calculations, we find that some of the larger European economies with very subdued growth (notably Italy) weigh on the growth of the bloc, and some of the more dynamic economies, with forecast growth rates exceeding 3% (for example, Slovakia) are currently too small to significantly affect the trajectory of the grouping as a whole. Above all, this highlights the dangers of referring to large and diverse groups as homogeneous blocs, whether “emerging markets” (as we noted in this research), “Europe”, “the EU”, or others.