Week 49, 2011: The UK Economy Part 2

Summary: This week the ERC invited professors from the top three economics departments in the country to give their predictions for the UK economy in 2012. Our chart this week is a snapshot of their forecasts.

What does the chart show? As last week, the red line shows the percentage change in quarterly Gross Domestic Product (GDP) on the previous quarter. The blue line shows the CPI measure of inflation as a percentage change on the previous year, averaged over a quarterly period. The yellow line shows the seasonally adjusted, quarterly, unemployment rate for all those aged 16 and over. 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 Professor John Muellbauer, of Oxford; the dashed line represents the forecast of Professor Hashem Pesaran of Cambridge; and the dotted and dashed line represents the forecasts of Professor Danny Quah of LSE.

Why is the chart interesting? The only category that the three professors agreed completely on was the Bank of England base rate, which they thought would stay at 0.5% until at least September 2012. In every other category, there was a certain amount of disagreement.

In GDP growth, Professor Quah was by far the most pessimistic of the three, predicting that GDP will fall sharply for two quarters before basically staying still. Professor Muellbauer also thought the UK was facing two quarters of decline, but was more optimistic about the eventual resurgence. On the other hand, Professor Pesaran predicted that GDP growth would not be negative at all.

All three thought that inflation would fall over the next year, but disagreed on how far and how fast; again, Professor Quah was the most gloomy, with Professor Muellbauer predicting the fastest decline in inflation (reaching 2.5% by the third quarter of 2012), and Professor Pesaran somewhere in between.

Similarly for unemployment: all three thought it is likely to rise next year, but disagree on how much. Professor Quah thinks it will reach as high as 11% by the second quarter of 2012 and stay there for the third quarter, whereas Professor Muellbauer predicted a peak of only 8.3% in the first two quarters of next year before falling slowly back. Again, Professor Pesaran was somewhere in between the other two.