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Economic Policy Committee

Potential Output Working Group

Potential output is the level of economic output that can be achieved when the economy operates at full capacity.

The concept of potential output is used in economic analysis to calculate the output of an economy if the underlying factors like capital and labour are utilized to their full extent (at non-inflationary levels). The difference between the actual output of an economy and its potential output is known as output gap. Potential output is a useful measure to evaluate the performance of an economy and estimate its long-term growth potential. It is also used to assess the sustainability of government finances.

The Potential Output Working Group (POWG) was set up under the name of the Output Gap Working Group (OGWG) and renamed following the 2024 reform of the economic governance framework, as the group’s focus shifted to the estimation of potential output.

  • The POWG aims, with the European Commission's technical support, to ensure scientifically robust and transparent potential output and output gap estimations.
  • The estimation methodology used is regularly assessed, including through ex-post evaluation of the results, and improved whenever deemed necessary.
  • Estimates of potential output and the output gap play an important role in the fiscal surveillance framework, particularly by underpinning the reference trajectory and technical information provided by the Commission ahead of the submission of Member States’ medium-term fiscal-structural plans.
  • Moreover, long-term projections of potential output contribute to the estimation of the economic and budgetary impact of an ageing population over the long-term in the Ageing Report.

The members of the working group comprise representatives with relevant background from all member states, the Commission and European Central Bank. Each Member State is represented by up to two experts.