Getting the answer right is the key to successful economic forecastingby Duncan Weldon / January 26, 2017 / Leave a comment
The figures are in. According to the initial estimate by the Office for National Statistics, UK GDP growth in the fourth quarter of 2016 came in at 0.6 per cent—and at 2 per cent for the year as a whole. That’s a touch above the consensus forecast but well ahead of what almost every observer—including your writer—was looking for just six months ago.
A good rule of thumb when looking at GDP figures is “never overanalyse one set of quarterly numbers, especially if they are only the first estimate,” but in the context of the wider failure of forecasting over the past few months, it seems prudent to set that rule aside and look at the bigger picture.
Since the UK voted to leave the European Union back in June, the economy has been resilient, even solid. True, growth has been reliant on the consumer and that consumer spending has been underpinned by a fall in the household savings ratio (the amount of disposable income that households, on aggregate, set aside), but, if we are honest, the same could be said for most periods of UK growth over the past few decades. That’s what our national growth model looks like.
Six months on it is worth stepping back and asking, what went wrong with the post-Brexit forecasts? Only after doing that can we have reasonable stab at estimating what the outlook for 2017 is.
It’s important here to be clear: we are talking about two distinct sets of propositions about what the impact of Brexit would be on the UK macroeconomy, one concerned the long-term, one concerned the short-term.
The (consensus) long-run view, which I still don’t see any reason to challenge too deeply, was that cutting ties with our largest trade partner would lead, over the years, to a more closed UK economy. It seems highly likely that whatever post-Brexit UK-EU deal we end up with, it will not be as deep as the current arrangements. And it strikes me as highly unlikely that our new won freedom to strike our own trade deals will be enough to make up for the loss of market integration with our most important economic partner.
A less open and less trade intensive UK economy should experience slower productivity growth in the coming decade—trade has…