The economy forecast

World economy and drivers of UK exports

This Forecast in-depth page has been updated with information available at the time of the March 2022 Economic and fiscal outlook.

Our UK exports forecast is normally built up using two key assumptions: demand growth in the markets that the UK exports to, and the share of that demand met by UK exporters. To estimate the direct impact of global economic conditions on UK exports, we start by forecasting world GDP growth, which informs prospects for world trade growth, in turn allowing us to forecast UK export markets growth. In our March 2022 forecast, following the Russian invasion of Ukraine, we did not produce a UK export market forecast, as post-invasion IMF world forecasts were not available in time.

As well as this direct effect, global financial market conditions can affect the UK economy indirectly, for example through broad confidence channels. To some extent, these effects are factored in via ‘conditioning assumptions’ for financial market variables. We also make further adjustments to our forecast if we judge them to be sufficiently material.

  World GDP

We normally produce a bottom-up forecast for world GDP growth by generating separate projections for various countries and regions, which can then be aggregated to give a forecast for global GDP. The largest economies and those that are important trading partners for the UK are treated on an individual basis. Smaller economies and those that make up less UK trade are grouped together, based on either their geographic location or characteristics of their economies. These country groupings are often based on similar groupings in the International Monetary Fund’s (IMF) forecasts.

To determine our GDP forecasts for each country group, we often use the IMF’s most recent World economic outlook (WEO) or its interim update forecast as the starting point. The IMF’s WEO forecasts have a five-year horizon and can also be broken down into similar country groupings, so they form a useful comparison to our own. We sometimes move away from the IMF’s WEO forecast when more recent data suggest that the IMF’s forecast no longer represents a central forecast, or simply if the BRC take a different view as to the likely path of GDP in any region. We also compare our forecasts for GDP growth against other global institutions and private sector forecasters. For instance, following the Russian invasion of Ukraine, our March 2022 World GDP forecast was revised down in the near term based on analysis from external organisations on the effects of the war on global output.

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  World trade

As with world GDP, we usually produce a bottom-up forecast for world trade growth. We generate projections for exports and imports growth in various countries and regions, before aggregating these into a forecast for world trade.

Again, the IMF WEO forecast is often used as the starting point for our world trade forecast. We will move away from that if the BRC takes a different view on the prospects for world trade (as a whole, or prospects in certain regions), on the basis of the latest data or indicators, including the CPB World Trade Monitor, or comparisons with other forecasters such as the OECD. In our March 2022 forecast, following the Russian invasion of Ukraine, we did not produce a UK world trade forecast.

A key diagnostic for our global forecast is the implied ‘trade intensity’ of world GDP growth, i.e. how much trade is likely to grow for a given GDP growth rate. Again, it is possible to compare the implied trade intensity of GDP growth in our forecast against other external forecasters, as well as against past values.

As well as providing the basis for our exports forecast, the world trade forecast also informs our UK imports judgements. That forecast is based on judgements about the future path of domestic demand and the import intensity of that demand, so we consider whether the implied import intensity of UK GDP growth is consistent with the trade intensity of global GDP growth. While the UK import intensity need not follow the global trend, if it does not, we need to assure ourselves that we have identified the economic rationale for that difference. This provides a useful sense-check on the forecast.

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  Export markets

We typically produce world GDP and trade forecasts because they affect UK trade, especially exports. We reweight our world trade forecast according to the proportion of UK exports accounted for by each region to get a forecast for imports growth among UK trading partners (which we call ‘UK export markets growth’). This forecast, combined with an assumption about the proportion of trade among export markets that we expect to be satisfied by UK exporters, will jointly determine our forecast for UK exports. In our March 2022 forecast, following the Russian invasion of Ukraine, we did not produce a UK export markets forecast.

Export markets growth is usually derived mechanically from our forecasts for imports growth in each global region, which represent total trade both within and between regions (i.e. we do not net off trade between two countries within a region, which is still treated as cross-border trade). We then use geographic trade data from the ONS Pink Book to calculate the proportion of UK exports that are accounted for by each of these regions and reweight our forecast for world imports on that basis. This gives an estimate of the size of the markets to which the UK exports and how we expect them to grow over the forecast period.

The global economy forecast also provides various inputs for other areas of the forecast. For example, inflation across the major global economies influences our forecast of the trade deflators in our inflation forecast. Our forecast for global inflation also drives our medium-term projection for oil prices.

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