Output Gap

A negative output gap means the economy is producing less than it could, with unemployed workers and unused capacity. A positive output gap means it is producing more than its sustainable level, often putting upward pressure on wages and prices.

For example, if potential GDP is estimated at 2,000 and actual GDP is 1,940, the output gap is minus 3%. The economy is operating below capacity.

The output gap is important for monetary and fiscal policy. A large negative gap suggests the economy needs support, through lower interest rates or government spending, and that inflation is likely to stay low. A large positive gap suggests the economy may be overheating, and central banks may raise interest rates.

Because potential GDP cannot be measured directly, output gap estimates are uncertain and can be revised significantly as new data arrive. Different organisations may estimate quite different gaps for the same economy at the same time.