Economists from Warwick Business School continue to find little evidence in the data to suggest that Brexit will lead to disappointing economic growth in 2017, forecasting GDP growth will likely be between two and three percent.
By using the second estimate of GDP released today by the Office for National Statistics (ONS) and in contrast to the recent forecasts from the Office for Budget Responsibility (OBR) and the Bank of England, the Warwick Business School Forecasting System (WBSFS) – which combines a group of state-of-the-art econometric models to produce judgement-free macroeconomic forecasts – finds no evidence in the latest data to suggest economic growth will disappoint in 2017.
But Brexit, and the uncertainty it has introduced, may well alter historical patterns in the data and explain the more pessimistic growth forecasts recently issued by the OBR and Bank of England. Commenting on the latest Warwick Business School forecasts, timed to coincide with publication of the latest GDP data from the ONS, Professor Ana Galvao, of the Economic Modelling and Forecasting (EMF) Group at WBS, said: “Since the referendum, the OBR and Bank of England have both become more pessimistic about prospects for GDP growth in the UK in 2017.
“In contrast, the WBS benchmark forecasts suggest a 75 per cent chance that growth in 2017 will in fact exceed the OBR’s and Bank’s latest forecasts. But the WBS forecasts are produced under the assumption that historical relationships and patterns in macroeconomic data continue to hold post-Brexit. They may well break down.” Professor James Mitchell, of the EMF Group at WBS, added: “What is especially uncertain is how the apparent increase in macroeconomic uncertainty, post-referendum, will affect relationships between official macroeconomic time-series. But what the WBS forecasting system does reveal is that while a change for the worse in terms of future economic growth may happen, recent economic data provide no clear indication that this will happen in 2017.”
Professor Anthony Garratt, of the EMF Group at WBS, said: “The WBS forecasting system also reveals how the Bank of England and OBR are much more confident that inflation will turn out higher than historical patterns in the data would lead us to suggest. In particular, likely anticipating the effects of the depreciation in the pound since Brexit, all three forecasters expect inflation to exceed the 2 percent target in 2017.”
Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee, the WBSFS combines a group of 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, 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 which show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts.