3 min read

The Great Recession probably ended a good while ago

The Great Recession probably ended a good while ago

The Great Recession is over. In fact, it probably came to an end last year – possibly even before that.

Now, I’ll admit that the above isn’t yet borne out by the official, or even unofficial, numbers. According to the Office for National Statistics, by the end of the first quarter of this year UK gross domestic product was still a few fractions of a percentage short of where it was at the start of the crisis in 2008.

As a result, most independent economists think we will almost certainly regain the pre-crisis peak this quarter – in other words round about now. So on this basis it’s fair to say that in practical terms we are probably there or thereabouts already.

In fact, if one looks at economic growth excluding the oil sector (itself a volatile element of GDP usually unrelated to broader macroeconomic trends), the pre-crisis peak was already regained last quarter.

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But these early estimates of GDP are really only a rough approximation of how much income the economy is generating. As fresh evidence comes to light in future months and years, the ONSwill revise these early estimates. And in most downturns the subsequent revisions have been upwards rather than downwards. often quite considerably. The upshot is that it seems likely – extremely likely – that the ONS has overstated the scale of the economic downturn that happened in previous years. So when the story of the 2008 recession is told a decade from now, the numbers will probably show that it was shorter and shallower than the initial terrifying numbers suggested.

Consider the 1990s recession. The initial ONS numbers suggested it involved a total 4% fall in national income, and that it took 15 quarters for the UK to regain its previous size. Years later the ONS revised the picture, such that the downturn was about 2% deep, and lasted only 10 quarters. 1990originalvsultimate

 

The fact that in recent years a whole range of unofficial indicators – consumer confidence, employment, activity as shown by purchasing managers indices – have been suggesting growth has been far stronger than the official data suggests that the same pattern is at play this time around as well. Official GDP simply seems to be a lot lower than most other yardsticks of growth would suggest.

Courtesy of Michael Saunders of Citi - this shows the difference between one unofficial estimate of sentiment and the official GDP numbers
Courtesy of Michael Saunders of Citi – this shows the difference between one unofficial estimate of sentiment and the official GDP numbers

Now, none of this changes the fact that in terms of sheer severity the recent recession and depression (the National Institute classifies a “depression” as the period for which a country’s output is below the pre-crisis peak) is the worst in modern history. It has been a whopping 25 quarters – more than six years – since the recession began. The previous record for longest slump was the recession which began in 1979 – where it took four years for the economy to regain its previous size. It would take an upwards revision of almost unprecedented scale to make this current downturn look better than that.

However, the revisions may well mean that in hindsight, Britain’s recession might look less nasty compared with other countries. As things stand, Britain has had the slowest recovery from recession in the G7 – save for France. But the UK’s GDP revisions may be a lot more positive than its counterparts in coming months. According to Michael Saunders of Citi, UK growth has been revised up more in 1999-2010 than any other G7 country. The contrast is particularly stark when one considers the data for exports (a key part of the GDP picture). Over that period, export growth was initially reported as about 0.8% a year on average; subsequent numbers have shown it to have grown by a stonking 3.6% a year. While other countries revised their numbers up, the revisions were far smaller.

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So while we will have to wait a little bit longer until the fat lady sings and the ONS declares the depression that began in 2008 to be at an official end, the likelihood is that that moment came quite a while ago. But you’ll have to wait another decade or so to see that confirmed!

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