In the very short term, we generate a forecast for real GDP using high-frequency data and survey indicators. It usually covers the quarter that is currently in progress (and will therefore not be covered by outturn data) and the next quarter. These high-frequency indicators would normally allow us to make an assessment of how much ‘momentum’ there is in the economy and, therefore, whether we expect quarterly GDP growth to pick up, slow or stabilise Since the onset of the pandemic they have instead helped us assess the extent to which voluntary social distancing and official restrictions are depressing the level of activity and, therefore, the likely increase in activity once restrictions are eased and voluntary social distancing declines.
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.
To form our judgements about the likely near-term path of GDP, we also use 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. 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 2012 Olympic Games or the additional bank holiday for the Queen’s Diamond Jubilee. In the March 2021 EFO forecast, we made extensive use of high-frequency data to estimate the impact that the lockdown measures, and subsequent easing of restrictions, had on activity in the first and second quarters of 2021.
Our assessment of momentum in the current quarter would normally inform 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.
In our March 2021 EFO forecast, our assessment of the extent to which official restrictions and voluntary social distancing were depressing activity in the first quarter, informed our judgement about the extent to which activity would recover in the second quarter as restrictions were lifted and voluntary distancing decreased. We then cross-checked our short-term output growth assumptions by considering the implications of the course of the pandemic, level of public health restrictions and other factors for individual sectors up to June 2021 when only a residual level of public health restrictions remained.
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.