Forecasting UK GDP growth to within 0.2 percentage points

The year 2020 was a particularly difficult one for economic and political forecasting. In a retrospective report, “Predicting the unpredictable: Forecasting in 2020”, we asked our analysts how they approached forecasting in a year like no other.

In the report, Matthew Oxenford, The EIU’s lead UK analyst, explains how we accurately forecast UK GDP growth in Q2 and Q3 2020 to within 0.2-0.3 percentage points.

How did we adapt our economic forecasting for the UK in 2020?

Forecasting UK GDP growth in 2020 required a different approach from our usual one, which essentially involves estimating the aggregate change quarter on quarter. Instead, we set out to build a picture of what was likely to happen sector by sector. To do this, we used statistics from the Office of National Statistics (ONS), which present the gross-value-added of the UK economy by sector. These data were sufficiently granular to make reasonable estimates of what a lockdown would do to each sector. We made three assumptions for each sector. First, we estimated the impact of lockdown on output in terms of how far down output would fall. Second, we tried to forecast how long the lockdown would last. Finally, we made assumptions about what a partial lifting of restrictions would mean for a revival of activity.

How successful was this approach?

By taking this bottom-up approach and extrapolating our sectoral estimates to the economy as a whole, our forecasts for the second quarter turned out to match the actual outturn (an annual contraction in real GDP of about 20%) to within 0.2 percentage points. We conducted a similar forecasting exercise for the third quarter of 2020 and managed to forecast the rebound in third-quarter real GDP to within 0.3 percentage points of the actual figure (an annual growth of more than 15%). Our success in using a sectoral approach for our UK GDP forecast has led us to explore how we can expand our sectoral projections in the future.

Elsewhere in Europe, we rightly expected that the impact of the crisis would be much greater than that of the global financial crisis, and identified early on that tourism-dependent economies such as Spain would be hit the hardest. Our view that demand-side effects would prove more severe and long-lasting than supply-side ones was also correct.

For an in-depth look at the trials and tribulations of forecasting throughout 2020 in both Europe and the rest of the world, download our latest report, “Predicting the unpredictable: Forecasting in 2020”.

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