The economy forecast

Real GDP growth

This Forecast in-depth page has been updated with information available at the time of the March 2024 Economic and fiscal outlook.

GDP stands for ‘gross domestic product’. It can be measured in cash terms (‘nominal GDP’) or in inflation-adjusted real terms (‘real GDP’). This section focuses on real GDP, which is a measure of the volume of goods and services produced in the economy. We split the discussion into sections that cover our:

  • Near-term GDP forecast where our forecast is informed by high-frequency indicators. In normal times, we use these to determine the degree of ‘momentum’ in the economy.
  • Medium-term GDP forecast which would normally be informed by our estimate of the output gap and the rate at which that output gap is expected to close. This ‘top-down’ approach is also informed and supplemented by the outlook for the individual expenditure components of GDP. If the output gap is expected to close within the forecast period (as is usually the case), we would generally assume that GDP grows in line with potential output over the remainder of the forecast.

  Near-term GDP forecast

The Office for National Statistics produces monthly estimates of GDP based on output components (e.g. construction or business services). These provide the most reliable early indicators of quarterly GDP and so are used as the basis for the preliminary estimates of quarterly GDP.

In the short term, we generate a forecast for real GDP using models that incorporate other timely indicators. These might include business surveys such as the IHS Markit/CIPS Purchasing Managers’ Index (PMIs) and from the Confederation of British Industry (CBI) and Office for National Statistics; or even more high-frequency indicators (such as Google mobility data). It usually covers the quarter that is currently in progress (and will therefore not be fully covered by monthly outturn data) and the next quarter. These high-frequency indicators would normally allow us to assess how much ‘momentum’ there is in the economy and, therefore, whether we expect quarterly GDP growth to pick up, slow or stabilise. If there are specific events that we believe are likely to have affected GDP in a given quarter, we will make any adjustments that we deem necessary. This could be due to unusual weather conditions or specific events – such as the additional bank holidays for the Queen’s Diamond Jubilee, Platinum Jubilee and funeral, or the lockdown restrictions in place during the covid pandemic.

Our assessment of momentum in the current quarter typically informs our judgement about GDP growth in the following quarter. This is supplemented by survey data on business expectations which, in general, are less reliable for forecasting than high-frequency, backward-looking indicators but are, nonetheless, useful.

OBR staff run the various models described above and present the results to the BRC. It is ultimately the BRC’s judgement on the most likely path for near-term GDP that is published as our forecast. The BRC decide which data or models they judge to be providing the most reliable indicators at any time, or the extent to which model predictions should be adjusted to reflect one-off factors.

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  Medium-term GDP forecast

In the medium term, our real GDP forecast is typically the result of other judgements about potential output and the output gap profile, which are ultimately made by the BRC:

  • We would normally start with our assessment of the current output gap – the amount of spare capacity in the economy or the extent to which it is ‘overheating’. That assessment is discussed further in the output gap section.
  • We then decide how quickly we expect economic output to return to our assessment of its potential level. This is informed by the outlook for the individual expenditure components of GDP, as well as the conditioning assumptions upon which our economic forecast is based.
  • Once the output gap is closed, we tend to assume that GDP grows in line with the economy’s underlying growth potential over the rest of the forecast.

Our forecast for potential growth – the most important element of our forecast – is determined by forecasts for its components: population, participation, employment, average hours and productivity. The expected path of productivity growth is particularly important in determining the rate of GDP growth in the medium term.

We make adjustments to our GDP forecast to reflect changes in government policy that we consider to be large enough to have a material impact. One important source of adjustment happens when the Government chooses to loosen or tighten fiscal policy (by spending more/less or cutting/raising taxes). To calculate the size of these adjustments, we use fiscal multipliers that are based on external estimates in the academic literature. More detail on our approach to determining the impact that fiscal policy will have on GDP growth is available in Box 2.2 of our December 2019 Forecast evaluation report and Box 2.1 of our November 2020 EFO.

Once we have a forecast for GDP growth we can then make judgements about prices and about the composition of total income and spending in the economy. It is these details – e.g., the split of national income between wages and profits, or of wages into employment and average earnings – that we use to produce our public finances forecasts.

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