UK Economic Update December 2017

As I write this, the reality of the referendum decision is beginning to take shape. And regrettably, it is as was forecast by us – the much maligned ‘experts’!
The headline is that for the next five years the UK’s trend growth rate is downgraded from 2.3% to 1.5%. This is significant.
The trend growth rate is best described as the steady state speed limit. The economy can run above it for a period of time during a boom but the longer it runs above trend (a booming economy), the longer it must run below it (a recession or slow growth).

The forecast begins by estimating the size of the ‘output gap’ between the economy’s current level of activity (as estimated by the ONS) and the ‘potential’ level, consistent with stable inflation in the long term. A negative output gap is associated with lower rates of capital and labour utilisation, implying some spare capacity in the economy; a positive output gap is associated with higher rates of resource utilisation and, if sufficiently positive, evidence of ‘overheating’ such as upward pressure on wage growth and inflation. Economists cannot measure the supply potential of the economy directly, so we use various techniques to estimate it indirectly, including statistical filters, cyclical indicators and production functions. The techniques used to construct these estimates are refined from forecast to forecast, so the precise variables and parameters may vary over time. The OBR uses 9 different methods.


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