Rewriting history: Great Recession edition

Rewriting history: Great Recession edition

Do you remember where you were on the afternoon of April 16 2013? George Osborne does. He was about to head off to Washington for the spring meetings of the International Monetary Fund, when, suddenly, the Fund’s chief economist, Olivier Blanchard, appeared on Sky News.

The Chancellor’s policies, said Blanchard, were the economic equivalent of “playing with fire”. He warned that economic growth in the UK looked extremely weak — that the country was at risk of another recession, and that Osborne should consider amending his austerity plans.

It was, perhaps, the lowest ebb for the Chancellor. At that point, the Office for National Statistics was reporting that UK gross domestic product (the most widely-used measure of national income) was shrinking. The UK was on the brink of yet another recession (the second of the Chancellor’s term, and the third since 2008). The eurozone was in crisis and for some, Britain still looked as vulnerable as some of the troubled European nations. And that was before one examined the still-awful state of the financial system.

The thing is: much of what we thought we knew about the economy then was simply wrong. That’s what the ONS has revealed today in a dramatic overhaul of previous years’ statistics. The gist of the story can be seen in the graph below, which depicts the scale of the recent recession compared with previous ones in British history. On the y axis 100 = the pre-crisis peak; on the x axis, the numbers are each quarter following the peak.

The lowest of those blue lines is the recession as previously reported by the ONS. As you can see, it shows how between the start of 2008 and mid-2009 the UK economy shrank by 7.2%. It then bounced around at the bottom but then, very gradually, found its way back towards the level at which it started. It was, as you can see by comparing these lines, the biggest economic collapse in British history — by some way. And the longest recovery.

According to these official numbers, Britain only regained its pre-crisis level last quarter (remember stories like this?). As this version of the official record has it, the depression — the period for which economic output is below its pre-crisis levels — only really came to an end this summer.

However, the ONS has re-examined its numbers. Big time. It has changed its methodology, included various items that were previously ignored (such as drugs and the sex trade, though their contribution to these revisions doesn’t seem to have been enormous), had a long, hard look at investment numbers, and has concluded that the path for the economy was rather different.

Consider the other blue line in the chart above (labelled Blue Book 2014 — the publication in which these revisions are included). You can see that on this basis the economy fell far less than in the previous official numbers. In fact, the fall in economic output was barely more than in the late ‘70s/early ‘80s recession.

So it now transpires that the economy regained its pre-crisis peak last summer (one needs to append unrevised figures for the post-2012 period to find this out, which implies treating them with a little caution).

Either way, the upshot is that last spring, when George Osborne was being berated by the IMF and many others, the UK economy was on the very brink of recovering from its depression. Nor was there any chance of a triple-dip recession. The ONS already revised that out of the history books some months ago.

Not only that; it also turns out the UK was also recovering at a faster rate than France and many of its European counterparts. According to the old ONS numbers Britain took far longer than France to get back to its pre-crisis level. The new, revised numbers suggest Britain was back to pre-crisis levels comfortably before its neighbours across the Channel (see the chart below).

However, even the newly-revised numbers don’t imply Britain’s recovery has been anywhere as quick as the one in the United States – or, for that matter, Germany’s.

Now, it’s worth remembering that none of the above should come as much of a surprise. The original ONS numbers always looked rather pessimistic. And the ONS, like all other major statistical bodies, has a habit of revising its figures quite considerably as new numbers come in. The first GDP estimates are always a very rough first draft of economic history. Moreover, another fundamental weakness in the economy — that of real wages — is not changed much by these figures: the squeeze on real incomes faced by UK families is still one of the worst in history.

But it’s a reminder that often what seems like solid economic fact is, in fact, anything but.