Business

Reality Check: Are official GDP forecasts too gloomy?

Following the Office for Budget Responsibility's economic forecasts, which accompanied the Autumn Statement, Iain Duncan Smith accused the official forecaster of "utter doom and gloom".

Is that fair?

There were particular challenges in making these forecasts, which we have discussed before, involving having to make forecasts for the economy post-Brexit without having any idea of the government's negotiating position.

As such, while some aspects of economic forecasting just involve sticking numbers into economic models, there are also some judgements to be made, so it's worth looking at the OBR's record so far to see if it has been gloomy.

The OBR has published 15 sets of Economic and Fiscal Outlooks since its first one in June 2010.

Let's start by looking at the forecasts for economic growth, measured by growth in GDP.

The number of times that the OBR has cut its GDP forecasts is equal to the number of times it raised them or left them unchanged, which does not suggest a bias either towards optimism or gloominess.

But there is a different picture if you compare the first or second forecasts that the OBR makes for a particular year with the final forecast it makes for that year.

As an example, the chart above shows all of the forecasts that the OBR made for growth for the whole of 2016.

Institutionally optimistic?

It turns out that the OBR's first and second forecasts for GDP or borrowing have always been higher than its final one - every time it turns out that the initial forecasts are too optimistic.

There is one exception to that, which is the figures for 2010, but that's barely a forecast because by the time the OBR made its first forecast 2010 was almost half-way through.

Does that mean that the OBR is institutionally optimistic?

It's an important question, because the first estimates are the ones for which the OBR has the least data and is using the most judgement.

It may not be a question of optimism - forecasts more than a few years out will often predict a return to "normal" levels of growth or borrowing, but several of the years since 2010 have been far worse than normal, which you would expect to make the OBR look optimistic.

Part of this is because forecasts are often based on the idea of economic shocks being temporary - if that is not the case then the return to normal will be at least delayed.

One of the biggest factors in this is productivity - the OBR still cites productivity as the biggest risk to its forecasts and it could be argued that the persistent failure of UK productivity to return to "normal" levels is to blame for GDP being lower than the OBR expected early on.

The OBR itself does this sort of exercise - this is its graph showing the extent of the differences between its first set of forecasts from June 2010 and what actually happened from its latest forecast evaluation report.

Image copyright OBR

It is clear, as the OBR said in its report, that economic growth has "repeatedly disappointed relative to forecast" in an economy that has been "stronger than expected in employment terms, but weaker in terms of earnings and productivity growth".

So the OBR certainly does not have a record of being too gloomy - if anything it is optimistic, although that may just be a result of the unusual sort of economy it has been asked to assess.


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