Week 49, 2015: UK Economic Forecasts

Summary: Last week, the Economic Research Council hosted our fifth annual economic forecasting event, the "Clash of the Titans", where we invited three economic experts to give their forecasts for 2016. Our chart this week summarises their forecasts.

What does the chart show? The blue line shows the percentage change in quarterly Gross Domestic Product (GDP) on the previous quarter. The red line shows the seasonally adjusted, quarterly, unemployment rate for all those aged 16 and over. The orange line shows the CPI measure of inflation as a percentage change on the previous year, averaged over a quarterly period. And finally, the green line shows the quarterly average of the official Bank of England interest rate.

For all four categories, the dotted line represents the forecast of Jonathan Portes, representing Oxford; the dashed line represents the forecast of Dr Sean Holly, representing Cambridge; and the dotted and dashed line represents the forecasts of Rain Newton-Smith, representing LSE.

Why is the chart interesting? Across all four categories, there was at least some disagreement, but the area with perhaps the closest consensus was unemployment.  All three of our "Titans" predict that the unemployment rate will stay between 5.1% and 5.3% in each of the four quarters for which we asked them to forecast.  However, only Jonathan Portes thought that the unemployment rate would rise over that period, reaching a trough of 5.1% at the end of this year before rising slightly to 5.2% by the third quarter of 2016.

On GDP growth, Jonathan Portes was by far the most pessimistic, forecasting that the quarterly growth rate would fall to 0.3% in by the middle of 2016.  This would represent the lowest growth rate since the end of 2012, when it was -0.1%.  Both Rain Newton-Smith and Dr Sean Holly thought growth would remain above 0.6% for the next four quarters, with Dr Holly forecasting a growth rate of 0.9% in the final quarter of this year (a rate that has only been achieved for two of the last twenty quarters).

All three forecasters thought that inflation would begin to rise by the middle of next year, but they disagreed over the timing and the speed of that increase.  Rain Newton-Smith is the outlier of the three, expecting average inflation over the fourth quarter of 2015 to be 0.2% (compared to -0.1% for both Dr Sean Holly and Jonathan Portes), rising as high as 1.4% by the third quarter of 2016 (compared to 1.0% for Dr Holly and 0.5% for Jonathan Portes).

Finally, the Bank of England's interest rate: none of the three expect Mark Carney and the MPC to raise the interest rate from 0.5% when they meet tomorrow.  However, Jonathan Portes thinks that they might start to increase rates towards the end of the first quarter of next year, and then keep them at 0.75% until at least the end of the third quarter.  Rain Newton-Smith forecast the same increase, but a quarter later, coming right in the middle of 2016.  Meanwhile, Dr Sean Holly doesn't think they'll increase at all over period.

If you think you can do better than our three experts, we'd love to hear your predictions for 2016; you can enter our free public forecasting competition on our website until Monday 4th January, with the top five most accurate forecasts winning prizes this time next year.  To enter, please click here.