The relationship between average annual and quarter-on-quarter GDP growth rates: implications for projections and macroeconomic analysis

The average annual growth rate of GDP can be formulated algebraically as a weighted average of the quarter-on-quarter growth rates of the preceding and the current year. Sometimes this can give rise to counterintuitive results and misinterpretations of how the economy is evolving. For example, a given sequence of GDP growth rates, in quarter-on-quarter terms, in the current year, may give rise to very different average annual rates depending on the trajectory of GDP in the preceding year. Also, with given quarter-on-quarter growth figures for the four quarters of a particular year, average GDP growth will be higher, the earlier in the year that the largest quarteron-quarter increases occur. In the context of macroeconomic projections, analysis tends to focus on average annual GDP growth rates, insofar as they offer a summarised version of the outlook. However, it should be noted that revisions to the current year’s projections with a particular sign (for example, upwards) may reflect changes of two types: first, the publication of new, more favourable National Accounts data for past quarters; and second, a downward revision to growth prospects for the remaining quarters of the year. Therefore, it would be a mistake to conclude from the mere observation of an upward revision to average annual growth that the economic outlook has improved.