On the Distributional Forecasting of UK Economic Growth with Generalised Additive Models for Location Scale and Shape (GAMLSS)

The UK’s economic growth has witnessed instability over these years. While some sectors recorded positive performances, some recorded negative performances, and these unstable economic performances led to technical recession for the third and fourth quarters of the year 2023. This study assessed the efficacy of the Generalised Additive Model for Location, Scale and Shape (GAMLSS) as a flexible distributional regression with smoothing additive terms in forecasting the UK economic growth in-sample and out-of-sample over the conventional Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM). The aim was to investigate the effectiveness and efficiency of GAMLSS models using a machine learning framework over the conventional time series econometric models by a rolling window. It is quantitative research which adopts a dataset obtained from the Office for National Statistics, covering 105 monthly observations of major economic indicators in the UK from January 2015 to September 2023. It consists of eleven variables, which include economic growth (Econ), consumer price index (CPI), inflation (Infl), manufacturing (Manuf), electricity and gas (ElGas), construction (Const), industries (Ind), wholesale and retail (WRet), real estate (REst), education (Edu) and health (Health). All computations and graphics in this study are obtained using R software version 4.4.1. The study revealed that GAMLSS models demonstrate superior outperformance in forecast accuracy over the ARDL and ECM models. Unlike other models used in the literature, the GAMLSS models were able to forecast both the future economic growth and the future distribution of the growth, thereby contributing to the empirical literature. The study identified manufacturing, electricity and gas, construction, industries, wholesale and retail, real estate, education, and health as key drivers of UK economic growth.