The dangers of the R word
Even if you weren’t following the referendum campaign closely you’ll probably remember a few of the economic highlights (lowlights?): the Vote Leave £350m bus; the “punishment Budget” and George Osborne predicting that there would be a recession if Britain left the EU.
Now we know that all three of these claims were, in their own way, wrong.
There will be no £350m a week public finances dividend (in fact the latest statistics, out today, imply the deficit this year will be even bigger than expected, before any discretionary giveaways the new Chancellor wants to add).
Even Mr Osborne ditched the idea of an emergency budget (punishment or otherwise) before he was booted out of 11 Downing Street.
And now it transpires that Britain looks like it will avoid a recession.
Now, in practice, this final point should be neither here nor there. The definition of a recession – two successive quarters of economic contraction – is, to say the least, pretty arbitrary. Other countries, most notably the US, prefer to declare recessions based on a whole range of other factors – but for some reason in Britain the convention of two quarters of contraction stuck.
So, for instance, if UK GDP shrinks by 0.1% for two quarters, that is a recession. If GDP is -0.9% one quarter and 0.1% the next, that is not a recession. Barmy – and totally misleading, since we are considerably poorer in the latter example (remember that gross domestic product is simply a measure of how much income the country is generating).
And yet, if only in public discourse, the distinction matters. People take much more notice of the R word than the threat of an “economic slowdown”. So, when, a month before the vote, the Treasury published its forecasts for the short-term impact of a Leave result the Chancellor made much of the fact that the HMT models suggested there would be a recession. The press office mocked up various placards saying the UK “would fall into RECESSION”, with the R word in a terrifying horror movie font.
This was, as I said at the time, misleading. In fact, the Treasury’s central forecast was for a 0.1% contraction for four quarters. This would, had it transpired, have been the shallowest recession in economic history. Moreover, in economics, 0.1 percentage points is essentially neither here nor there.
None of that seemed to matter to the Chancellor. He had his recession forecast and he spent the next month warning that the economy would indeed tip into it.
Roll forward to today, almost three months after the vote, and it simply doesn’t look as if the UK economy is in recession. The OECD has cut its forecast for growth next year, but has actually raised its projection for this year. And as Joe Grice, chief economist of the Office for National Statistics says, “the referendum result appears, so far, not to have had a major effect on the UK economy. So it hasn’t fallen at the first fence but longer-term effects remain to be seen.”
Indeed, whereas last month the average forecast from City economists was indeed for a recession, they now expect zero growth this quarter and next. So no recession.
Now in practice, what matters is that, if you believe the economists, this is nonetheless much weaker than the 0.5% a quarter growth rate that was anticipated before the referendum. In other words, our national income is still forecast to be much weaker than previously. However, because of our fixation, because of the Treasury’s fixation with the r-word, the economic fraternity has been discredited again.