Prospects of lacklustre UK GDP growth increasing

24 August 2017

  • WBS Forecasting Systems uses five state-of-the-art econometric models
  • Model predicts 88 per cent chance of 2017 GDP growth below two per cent
  • And lower probability that higher inflation rates will persist into 2018
  • But more optimistic about growth in 2018 than the Bank of England

The Warwick Business School Forecasting System (WBSFS) predicts that the probability of lacklustre growth of less than two per cent for 2017 as a whole is now 88 per cent, up from 68 per cent one quarter ago and 38 per cent two quarters ago.

Following the update of GDP data by the ONS confirming that the UK economy grew by 0.3 per cent in the second quarter of 2017 and grew by 1.7 per cent between 2016 and 2017, the WBSFS has calculated GDP and inflation forecasts.

Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee the WBSFS combines five state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation. These forecasts are updated each quarter to reflect the latest data.

By using model averaging and following well-established methods in statistics, meteorology and economics, the WBSFS takes a weighted combination of each models’ forecasts, where higher weights are awarded to models that show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts.

Slowing down: The WBSFS graphs show GDP likely to be below two per cent this year

The prospects for growth in 2018 are considerably more uncertain, both on the upside and downside. But the WBSFS  is slightly more optimistic about upside prospects than one quarter ago.  

Although the pound has depreciated since the referendum last June and inflation has picked up, relative to one quarter ago, there is now a lower probability that inflation will exceed three per cent in 2017 – the probability has fallen from 25 per cent to 10 per cent. There remains, however, a 23 per cent probability that inflation exceeds three per cent in 2018, although this probability forecast has fallen from 32 per cent one quarter ago.

Related course: MSc Finance & Economics

Professor Ana Galvao, of the Economic Modelling and Forecasting (EMF) Group at WBS, said: “Conditioning on the ONS’ latest GDP growth estimates for the second quarter of 2017, the WBSFS reveals an 88 per cent chance of lacklustre GDP growth of less than two per cent in 2017.”

Professor James Mitchell, of the EMF Group at WBS, added: “While prospects for economic growth in 2018 are considerably more uncertain than in 2017, there has been an increase, from 48 to 55 per cent, in the probability of GDP growth greater than two per cent in 2018. Accordingly, the WBSFS is now slightly more optimistic about growth prospects in 2018 than the Bank of England and the panel of independent forecasters surveyed by HM Treasury.”

Professor Anthony Garratt, of the EMF Group at WBS, said: “While the WBSFS agrees with the Bank of England and HM Treasury’s panel of independent forecasters that inflation for 2017 will most likely be between two and three per cent, the WBSFS now predicts a lower probability that higher inflation rates will persist into 2018. 

"According to the WBSFS, the probability of inflation exceeding three per cent in 2018 has fallen from 32 per cent one quarter ago to 23 per cent.” 

For more on the WBSFS visit its website.

Professor James Mitchell teaches Managing in a New World on the Full-time MBA and Economics of the Business Environment? on the Executive MBA and Executive MBA (London)

Professor Anthony Garratt teaches Economics in the Global Environment on the MSc Management course and on the Executive MBA and Empirical Applications in Macro, Financial and Energy Economics? on the MSc Finance.

Professor Ana Galvao teaches Economics for Management and Business and Forecasting for Decision Makers on the MSc Management course.

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