The latest report from Warwick Business School, (WBS) Forecasting System (WBSFS) expects low inflation to persist through 2016 and 2017 with it now a near-certainty that it will remain at less than one per cent for the whole of this year.
It also predicts that UK growth will be between two and three per cent through 2016 and 2017. (Please see attached graph)
Any economic uncertainty associated with Brexit has not as yet changed the balance of risks to economic growth relative to our forecasts a quarter ago. This contrasts with recent downward revisions to forecasts from the IMF and the Treasury's panel.
The WBSFS estimates only a two per cent chance of growth of less than one per cent in 2016; and an 11 per cent chance of growth of less than one per cent in 2017. But a vote to exit the EU could significantly change these forecasts.
The risks to inflation in 2016 and 2017 continue to be on the downside. It is now a near-certainty that inflation will be less than one per cent for 2016 as a whole. In 2017, there remains a three-in-five chance of inflation of less than one per cent and a one-in-four chance of deflation.
Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee, the WBSFS combines a group of state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation. These forecasts are updated each quarter to reflect the latest data.
By using model averaging, following well-established methods in statistics, meteorology and economics, the WBSFS takes a weighted combination of each models’ forecasts, where higher weights are awarded to models which show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts.
Commenting on the latest Warwick Business School forecasts, timed to coincide with publication of the latest GDP data from the ONS, Professor Ana Galvao, of the Economic Modelling and Forecasting (EMF) Group at WBS, said: “Any economic uncertainty associated with Brexit has not as yet changed the balance of risks to economic growth relative to our forecasts a quarter ago.
"This contrasts recent downward revisions to forecasts from the IMF and the Treasury's Panel. The WBSFS estimates only a two per cent chance of growth less than one per cent in 2016; and an 11 per cent chance of growth less than one per cent in 2017. But a vote to exit could significantly change these forecasts.”
Professor James Mitchell, of the EMF Group at WBS, added: “The WBSFS points to a sizeable risk that low inflation persists over the next couple of years. It estimates that it is near-certain that inflation will be less than one per cent in 2016, relative to a one-in-two chance three quarters ago. In 2017, there remains a three-in-five chance of inflation less than one per cent and a one-in-four chance of deflation.”
Professor Anthony Garratt, of the EMF Group at WBS, said: “The WBSFS is more confident than the Bank of England and Treasury panel that the current low inflation rates in the UK will persist through 2016 into 2017. There is between a 72 per cent and 85 per cent chance that inflation falls below their central expectations for 2017.”