UK Forecasts of Annual GDP: Their Accuracy and the Information Categories Underlying Their Revisions

ABSTRACT Policy makers are concerned with the accuracy of GDP forecasts and want to understand the reasons for the revision of forecasts. We study these issues by examining forecasts of annual UK GDP growth by a panel of agents, published monthly by HM Treasury. We focus on two main issues: the developing accuracy of the group‐mean forecast as horizons shorten and the identification of information categories underlying agents' forecast revisions. The accuracy of the group‐mean forecast is poor; there is evidence of information rigidity in forecasts within the target year, and accuracy only improves in May of the target year when contemporary information flows lead to increased accuracy. We find a pessimism bias; the median errors of group‐mean forecasts are increasingly positive for horizons shorter than 17 months. We seek to explain revisions to both long‐ and short‐horizon group‐mean forecasts and individual agent forecasts. Modeling individual agents' forecast revisions using a moving window, we note a consistent tendency by agents to revise their forecast towards the group‐mean. Although their importance varied over time, the main information categories explaining revisions were, over longer horizons, the cost of finance, production, and a business confidence indicator. FX rates and inflation were influential over shorter horizons.