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WBS UK Probabilistic Forecasts, Oct 2019

The figure below presents WBSFS’s latest (as of 11th October 2019) probabilistic forecasts for real GDP growth and inflation – defined as year-on-year growth rates for 2019Q4 and 2020Q4 – as histograms. The information set used to produce these forecasts includes information on GDP growth up to 2019Q2 and data on CPI inflation up to August 2019.

wbsfs_oct19

To aid visualisation, output growth forecast outcomes greater than 1% are coloured green, red otherwise. For inflation, green outcomes are defined as inflation within the Bank of England’s target range of 1%-3%, such that the Governor does not have to write a letter of explanation to the Chancellor; forecast outcomes outside the target range are coloured red.

Table 1 extracts from these histogram forecasts the probabilities of specific output growth and inflation events. The events considered are the probability of output growth being less than 0%, 1% and 2%, and of inflation lying outside the 1-3% target range (i.e., the probability of the Bank of England’s Governor having to write a letter explaining how and why inflation has breached its target range). Also reported are the individual probabilities of inflation being less than 1% and greater than 3%, to indicate which side of the target range is most likely to be breached.

Table 1: Probability Event Forecasts for 2019Q4 and 2020Q4 year-on-year Real GDP Growth and CPI Inflation
Year
Real GDP Growth (%, p.a.)
CPI Inflation (%, p.a.)
 
P(growth<0%)
P(growth<1%)
P(growth<2%)
P(letter)
P(inf<1%)
P(inf>3%)
Updated Forecasts (October 2019)
2019Q4
10%
56%
93%
15%
12%
3%
2020Q4
11%
30%
60%
35%
18%
17%
Previous Forecasts (July 2019)
2019Q4
4%
20%
60%
32%
28%
4%
2020Q4
8%
24%
53%
41%
26%
15%

 

An examination of the output growth forecasts for 2019Q4, reported in Table 1, suggests they were strongly affected by the 2019Q2 quarterly growth rate estimate of -0.2%. Compared with our forecasts made one quarter ago, the risk of “low” growth (growth less than 1%) in 2019Q4 is considerably higher than last quarter: the predictive probability of this event has increased from 20% to 56%. The most likely range for output growth in 2019Q4 is [0% to 1%], with a 1 in 2 probability, a shift down from the [1% to 2%] range predicted last quarter. Accordingly, the probability that growth in 2019Q4 exceeds 2% declined from 40% one quarter ago to just 7% in the current quarter.

The change in the predicted probabilities is less pronounced when looking further ahead to 2020q4. Whilst we forecast a lower chance, of 40%, that growth exceeds 2%, this represents a modest change compared to the probability forecast of 47% made last quarter. The most likely output growth range remains in the [1% to 2%] range, with a probability of 30%.

We also observe sizeable changes in the inflation outlook when updating the information set from July to October. The probability of inflation falling outside the [1% to 3%] range in 2019Q4 has decreased from 32% in July to 15% in October, although this partly reflects a reduction in uncertainty as the forecast horizon shortens. The probability of inflation being less than 1% in 2019Q4 has decreased from 28% last quarter to the current 12%; whilst the probability of inflation exceeding 3% is approximately the same as last quarter (3% compared to 4%). Looking further ahead to 2020q4, the forecast uncertainties remain, with the probability of writing a letter at 35%, reduced from 41% forecast a quarter ago. This largely arises due to a lower probability of inflation being less than 1%, 26% in July compared to 18% in October.