Manufacturing output growth is projected to be relatively strong in Q3 2017 and retail sales have also held up well, but other services sectors and particularly construction have been weaker
The projection for third quarter growth is based on PwC’s new nowcasting model, which uses machine learning techniques to produce more timely GDP estimates.
UK growth has already eased from 0.6% quarter-on-quarter in Q4 2016 to 0.3% in both the first and second quarter of 2017. This pattern is expected to continue in the third quarter of 2017 with growth again projected to be 0.3% according to PwC’s nowcasting model.
John Hawksworth, chief economist at PwC, commented:
“There is no way to predict GDP growth with perfect accuracy, but our nowcasting model, using the latest AI-based machine learning techniques, has performed well in tests using data for the past five years.
“It allows us to look at a very broad range of explanatory variables to estimate how fast the economy is growing several weeks ahead of official preliminary estimates being published by the ONS.
“The model points to continued sluggish UK growth of only around 0.3% in the third quarter. While manufacturing and retail sales growth has been relatively strong in the third quarter, this is offset by slower estimated growth in the transport and communications sector and a continuing fall in construction output.
“For 2017 as a whole, we project UK GDP growth to be 1.5%, lower than either the US or the Eurozone as the reality of Brexit starts to bite.”
Notes to editors
Nowcasting models are becoming an increasingly popular tool for policymakers globally and are predominantly used by Central Banks, such as the Bank of England, and sub-national monetary authorities such as The Federal Reserve Bank of Atlanta. They can also be applied more generally to leverage the benefits of ‘Big Data’ to help businesses understand the present state of their markets better.
PwC’s nowcasting model takes a broad set of frequently released indicators and uses a machine learning technique known as Elastic Net Regularisation and Variable Selection (‘Elastic Net’) to estimate the relationship between these different indicators and past GDP growth. Using this method (i) accounts for the co-movement between different variables over time; (ii) automatically selects variables in the model by learning which ones are most useful at predicting GDP; and (iii) predicts GDP more accurately by using a type of cross-validation (fitting the model over different sub-sets of the data). But expert human input is still required to frame the problem, evaluate alternative modelling approaches and interpret results.
As the services sector now accounts for almost 80% of UK GDP, a number of services-focused variables have been included in the consolidated set of variables that the model considers to nowcast GDP growth. These have also been complemented with other indicators to account for the industrial production and construction sectors, as well as other indicators such as house prices and retail sales growth.
Full details of the model were published in the July 2017 edition of PwC’s regular UK Economic Outlook report, which is available at www.pwc.co.uk/ukeo. The model has now been updated to reflect the revised UK national accounts data published on Friday 29th September.
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