While underlying UK growth remains steady at 0.4% in Q1 2018 according to PwC’s latest nowcasting model projections, factoring in adverse weather conditions could reduce actual GDP growth in the first quarter to 0.2-0.3%. Snow in February hit construction output and the same is likely to be true for March, also slowing down parts of the services sector.
John Hawksworth, chief economist at PwC, commented:
“The last time we had such significant snowfalls, in December 2010, there was a marked dip in quarterly UK GDP growth. Construction output fell sharply and retail and leisure spending was hit in the run up to Christmas. This was only partly offset by a sharp rise in energy consumption for heating.
“This time around, the adverse effects of the snow should be less marked. Manufacturing seems to have been less affected and energy use will have increased.
“Quantifying these effects is difficult, but we estimate they could lead to actual GDP growth in Q1 2018 of 0.2-0.3%, slightly less than our machine learning model estimate of 0.4% underlying growth.
“Any such adverse weather effects should only be temporary, however, with output likely to bounce back in Q2 2018. We have not changed our main scenario of 1.5% GDP growth for 2018 as a whole. For monetary policy decisions and business planning purposes, we would therefore recommend focusing on the underlying picture of continued moderate but steady UK growth.”
PwC’s nowcasting model has proved accurate in predicting UK GDP growth over the past six years, using the latest AI-based machine learning techniques. It looks at a very broad range of explanatory variables to estimate how fast the economy is growing some weeks ahead of official preliminary estimates being published by the ONS. Some human judgement is required, however, to factor in unusual events such as the snow seen at the end of February and in March.
Notes to editors.
1. GDP nowcasting models have become an increasingly popular tool for economic policymakers globally, including central banks such as the Bank of England.
2. PwC’s nowcasting model takes a broad set of frequently released indicators and uses machine learning to estimate the relationship between these different indicators and past GDP growth. As the services sector now accounts for almost 80% of UK GDP, a number of services-focused variables feature in the model. These have been complemented with other indicators to account for the industrial production and construction sectors, as well as other indicators such as house prices and unemployment.
3. As the chart below shows, the model has performed well in out of sample tests for the past six years. The average model prediction of quarterly UK GDP growth of 0.53% has been in line with actual average growth over this period, while the absolute average model forecasting error of 0.15% is low compared to other methods.
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