Forecasting potential output – the supply side of the economy

This is a function of the size of the population, the proportion of the population willing and able to work (the participation rate), the sustainable share of participants in the labour market that are able to find work (one minus the equilibrium unemployment rate), and the average number of hours those in employment can sustainably work. [...] As a result, determining the level of potential output typically requires the modeller to infer it by using ONS and other data to make judgements about the size of the output gap (see Box 1.1 above) or the level of over- or under-utilisation of resources in the economy. [...] Determining the starting level of potential output 3.2 In our five-year forecasts we infer the starting level of potential output from the most recent data on actual GDP and our estimate of the starting level of the output gap. [...] Developments in data, methodology, and approach Developments in methodology 3.5 Over the past 12 years, we have adapted our approach to estimating potential output to take account of significant improvements in our forecasting models and in data produced by the ONS: • Given its importance in understanding the state of the economy in the aftermath of the 2008 financial crisis, we made several impro. [...] We revised our assumptions about the impacts of the NLW in March 2020, following the Treasury-commissioned Dube review of the international evidence on the impacts of minimum wages,23 by lowering the effects of changes in the sustainable rate of unemployment and trend average hours from around 0.2 to around 0.15 percentage points each (with the offsetting impact through productivity also tempered.