Downside Risks to UK Inflation and Economic Growth Increase: Warwick Business School

The downside risks to economic growth in 2016 have increased relative to a quarter ago.

The Warwick Business School Forecasting System (WBSFS) now believes there to be a 10 per cent chance of growth of less than one per cent in 2016, compared to a six per cent chance a quarter ago; and a 45 per cent chance of growth of less than two per cent, relative to a 28 per cent chance a quarter ago.

Nevertheless, economic growth in the UK is likely to continue through 2016 and 2017 at the same rate as in 2015, with the most likely outcome being growth of between two and three per cent a year, according to WBSFS.

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.

Inflation Forecast to Remain Under 1% in 2016, Could Undershoot Bank of England Forecasts

The risks to inflation in 2016 and 2017 continue to be on the downside, with close to 90 per cent chance that inflation is less than one per cent in 2016.

The probability of inflation greater than three per cent is forecast to be essentially zero in 2016, rising to a modest five per cent in 2017.

Professor Anthony Garratt, of the EMF Group at WBS, said: “Our latest forecasts point to less consensus across economic forecasters, including the HMT and the Bank of England, about UK inflation prospects.”

The WBSFS suggests that inflation is more likely than not to fall beneath the latest central forecasts from the Bank of England and the HMT Panel of Independent Forecasters.

"We estimate close to a nine-in-ten chance of inflation less than one per cent in 2016 relative to a one-in-two chance half a year ago. Our forecasts, therefore, point to a sizeable risk that the currently low inflation rates persist over the next couple of years. However, GDP growth is expected to continue, albeit now with heightened downside risks,” says Garratt.

Downside Risks to Economic Growth Rise

The data comes on the same day the ONS confirms economic growth of 2.2 per cent in 2015.

Professor Ana Galvao, of the Economic Modelling and Forecasting (EMF) Group at WBS, said:

“The downside risks to GDP growth in 2016 have increased relative to a quarter ago. While the most likely outcome is still that growth continues through 2016 at the same sort of pace as in 2015, the WBSFS now forecasts there to be a 35 per cent chance of 'low growth' between one and two per cent. Last quarter we forecast only a 21 per cent chance of 'low growth'.

Professor James Mitchell, of the EMF Group at WBS, added:

“These elevated downside risks to economic growth in 2016 are consistent with the OECD recently revising down by 0.3 percentage points their point forecasts for UK growth in 2016.”

The WBSFS is, however, not expecting this asymmetry in the balance of risks to continue into 2017.

The upside and downside risks to growth in the UK are more evenly matched as we look ahead to 2017.

No Material Dangers to UK Economic Growth Say Capital Economics

Offering a steady assessment of the latest GDP numbers out of the UK is Vicky Redwood, Chief Economist at Capital Eonomics.

Redwood says with GDP still estimated to have risen by a quarterly 0.5% in Q4 of last year, the UK recovery is still looking solid, but unspectacular.

"A number of clouds loom on the horizon, but we don’t think that a sharp slowdown is in store," says Redwood.