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Posts Tagged ‘double-dip recession’

UK growth update

The latest preliminary GDP estimates for 2014 Q1 suggest that the economy’s output (real GDP) expanded by 0.8 per cent following on the back of a 0.7 per cent increase in 2013 Q4. Growth was observed in three of the four main industrial sectors: 0.9% in services, 0.8% in production and 0.3% in construction. In contrast, output decreased by 0.7% in agriculture. The total output of the economy is now just 0.6 per cent below its 2008 Q1 peak with the output of the service sector now 2.0 per cent higher.

Data on growth need to be set in the context of the inherent volatility of economies and in this case in the context of 2008/9 recession. Then, output fall by some 7.2 per cent. UK output peaked in 2008 Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters during which output declined.

Output declined again in 2010 Q4 (-0.2% growth), in 2011 Q4 (-0.1% growth), in 2012 Q2 (-0.4%) and in 2012 Q4 (-0.2%). A double-dip recession was only narrowly avoided with growth recorded at zero on 2012 Q1. The latest ONS numbers show the economy grew by 0.8 per cent in 2013 Q2 (to £381.318 billion at 2010 prices), by 0.8 per cent in 2013 Q3 (to £384.533 billion at 2010 prices), by 0.7 per cent in 2013 Q4 (to £387.138 billion at 2010 prices) and by 0.8 per cent in 2014 Q1 (to £390.235 billion at 2010 prices). Compared with 2013 Q1, the output of the UK economy in 2014 Q1 is 3.1 per cent higher.

Chart 1 helps to put the recent growth numbers into an historical context. It shows the quarterly change in real GDP since the 1980s. We can see the 5-quarter recession that commenced in 1980 Q1 when output shrunk by 4.6 per cent, the 5-quarter recession that commenced in 1990 Q3 when output shrank by 2.4 per cent and the 6-quarter recession that commenced in 2008 Q2 when output shrank by 7.2 per cent. (Click here to download the chart to PowerPoint.)

Chart 2 scratches a little below the surface by looking at output by the 4 principal industrial types. The interesting finding is that the output of the service sector has now risen above its 2008 Q1 peak. In 2014 Q1, service sector output was 2.0 per cent higher than 2008 Q1. The fact that total output remains 0.6 per cent lower can be explained by the lop-sided industrial recovery. Output in agriculture, forestry and fisheries remains 7.1 per cent lower, production (including manufacturing) 11.5 per cent lower and construction 12.2 per cent lower. (Click here to dowload the chart to Powerpoint.)

Data
Preliminary Estimate of GDP – Time Series Dataset Q1 2014 Office for National Statistics
Gross Domestic Product Preliminary Estimate, Q1 2014 Office for National Statistics

Articles
UK GDP ‘close to pre-crisis level’ says NIESR BBC News (9/5/14)
UK ‘great recession’ almost over, says thinktank Guardian, Katie Allen (9/5/14)
UK economy tops its pre-crash high point, says NIESR Telegraph, Szu Ping Chan (9/5/14)
UK economy grew by 0.8% in first three months of 2014 Guardian, Katie Allen and Angela Monaghan (29/4/14)
Manufacturing is GDP star performer BBC News, Robert Peston (29/4/14).

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at Chart 1 above, summarise the key patterns in real GDP since the 1980s.
  3. What is a recession? What is a double-dip recession?
  4. What are some of the problems with the traditional definition of a recession?
  5. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  6. What factors lead to economic growth being so variable?
  7. What factors might explain the very different patterns seen since the late 2000s in the volume of output of the 4 main industrial sectors?
  8. Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
  9. Explain the arguments for and against using GDP as a measure of a country’s economic well-being.
  10. Analyse the role that the financial system might play in contributing to or alleviating the business cycle.
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A (further) review of recent UK growth numbers

The latest preliminary GDP estimates for 2013 Q3 suggest that the economy’s output (real GDP) expanded by 0.8 per cent following on the back of a 0.7 per cent increase in Q2. Growth was observed across the main industrial sectors with the important service sector growing by 0.7 per cent. While the output of the service sector is now 0.5 per cent higher than its 2008 Q1 peak, the total output of the economy remains 2.6 per cent below its 2008 Q1 peak.

The volatility of growth underpins the idea of business cycles and on occasions results in recessions. Today’s release needs to be set in the context of this volatility and in the context of 2008/9 recession which saw output fall by 7.2 per cent. UK output peaked in 2008 Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters during which output declined.

Output declined again in 2010 Q4 (–0.2% growth) and again in 2011 Q4 (–0.1% growth). The estimates of real GDP for 2011 Q4 and 2012 Q1 are identical at £376.462 billion (at 2010 prices). Previous revisions have seen the 2012 Q1 growth number revised up so that a further recession resulting in a double-dip recession no longer appears in the figures.

While output is now portrayed as (very) flat in 2012 Q1, it did fall again in 2012 Q2 (–0.5 per cent growth) and in 2012 Q4 (–0.3 per cent growth). Moving forward in time, the latest ONS numbers show an economy that grew by 0.4 per cent in 2013 Q1 (to £377.301 billion at 2010 prices), by 0.7 per cent in 2013 Q2 (to £379.780 billion at 2010 prices) and by 0.8 per cent in 2013 Q3 billion (to £382.818 billion at 2010 prices). Compared with 2012 Q3, the output of the UK economy in 2013 Q2 is 1.5 per cent higher.

Chart 1 helps to put the recent growth numbers into an historical context. It shows the quarterly change in real GDP since the 1980s. From it, we can see the 5-quarter recession that commenced in 1980 Q1 when output shrunk by 4.6 per cent, the 5-quarter recession that commenced in 1990 Q3 when output shrank by 2.4 per cent and the 6-quarter recession that commenced in 2008 Q2 when output shrank by 7.2 per cent. (Click here to download a PowerPoint of the chart.)

Chart 2 scratches a little below the surface by looking at output by the four principal industrial types. The interesting finding is that the output of the service sector has now risen above its 2008 Q1 peak. In 2013 Q3 output is 0.5 per cent larger. By contrast, the other three sectors remain smaller than in 2008 Q1. Agriculture, forestry and fisheries is 5.9 per cent smaller, construction 14.3 per cent smaller and production (including manufacturing) is 14.6 per cent smaller. (Click here to download a PowerPoint of the chart.)

With today’s release, quarterly growth now averages –0.11 per cent since 2008 Q2. If we take the series back to the mid 1950s when it began, the average quarterly rate of growth is 0.64 per cent which is equivalent to an annual rate of increase of 2.57 per cent. While today’s news is encouraging it remains important to keep it in perspective and to ensure that growth is sustainable and built on firm foundations.

Data
Preliminary Estimate of GDP – Time Series Dataset Q3 2013 Office for National Statistics
Gross Domestic Product Preliminary Estimate, Q3 2013 Office for National Statistics

New Articles
UK economy grows by 0.8% – the fastest pace in three years Guardian, Larry Elliott (25/10/13)
UK economy grew by 0.8% in third quarter Independent, Nick Renaud-Komiya (25/10/13)
UK GDP: fastest growth for three years BBC News (25/10/13)
UK economy grows by 0.8pc in third quarter Telegraph, Szu Ping Chu (25/10/13)
UK Economy: GDP Growth Accelerates To 0.8% Sky News (25/10/13)

Previous Articles
GDP grows 0.7% as UK economy shows steady recovery Guardian, Phillip Inman (26/9/13)
Hopes of economic recovery take double blow as GDP remains at 0.7% Independent, Russell Lynch (26/9/13)
UK economic growth confirmed at 0.7% BBC News (26/9/13)
IMF cuts global growth outlook but raises UK forecast BBC News (9/10/13)
Good news as IMF upgrades UK’s growth forecast Independent, Ben Chu (8/10/13)
Economy: IMF Makes UK Growth Forecast U-Turn Sky News (8/10/13)

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at Chart 1 above, summarise the key patterns in real GDP since the 1980s.
  3. What is a recession? What is a double-dip recession?
  4. What are some of the problems with the traditional definition of a recession?
  5. Explain the arguments for and against the proposition that the UK has recently experienced a double-dip recession.
  6. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  7. What factors might result in economic growth being so variable?
  8. What factors might explain the very different patterns seen since the late 2000s in the volume of output of the 4 main industrial sectors?
  9. Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
Share in top social networks!

When is a recession a recession (update) – a review of recent UK growth numbers

One very important characteristic of economic growth is its short-term volatility. The volatility of growth underpins the idea of business cycles and on occasions results in recessions. The traditional definition is where real GDP (output) declines for 2 or more consecutive quarters. Interestingly, the latest GDP numbers contained in the Quarterly National Accounts mean that the recession previously evidenced from 2011 Q4 to 2012 Q2 has effectively disappeared. Nonetheless, output today is still 3.3 per cent lower than before the 2008 economic downturn.

The ONS’s latest output numbers raise some interesting questions around our understanding of what constitutes a recession. Should, for instance, we define it solely in terms of real GDP and, even if we do, is a strict statistical definition based around two consecutive quarterly falls appropriate? The recent estimates from the ONS show that the 2008/9 recession saw output fall by 7.2 per cent. They show that UK output peaked in 2008Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters during which output declined.

Output declined again in 2010 Q4 (-0.2% growth) and again in 2011 Q4 (-0.1% growth). The new estimates of real GDP for 2011 Q4 and 2012 Q1 are now identical at £376,462 billion (at 2010 prices). Previous revisions have also seen the 2012 Q1 growth number revised up and, hence, a further recession resulting in a double-dip recession has effectively now been statistically removed. The 2013 Q1 Quarterly National Accounts revised growth up so that 2012 Q1 only saw a percentage fall when measured to the third decimal place (–0.007% growth).

While output is now portrayed as (very) flat in 2012 Q1, it did fall again in 2012 Q2 (-0.5 per cent growth) and in 2012 Q4 (-0.3 per cent growth). Moving forward in time, the latest ONS numbers show that the economy grew by 0.4 per cent in 2013 Q1 (to £377,301 billion at 2010 prices) and by 0.7 per cent in 2013 Q2 (to £379,780 billion at 2010 prices). Despite this, output remains 3.3 per cent below its 2008 Q1 peak. A more positive spin on the numbers would be to point out that output is up 4.2 per cent from its 2009 Q3 trough (£364,557 billion at 2010 prices).

Perhaps the debate around the appearance and disappearance of recessions in official data strengthen the argument for a more holistic and considered view of what constitutes a recession. In the USA the wonderfully-named Business Cycle Dating Committee takes a less fixed view of economic activity and, hence, of recessions. Its website argues:

It (the Committee) examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).

Of course, the advantage of focusing on real GDP alone in measuring activity and in determining recessions is that it is usually very straightforward to interpret. Regardless of whether the UK did or did not experience a recession at the end of 2011 and into 2012, the chart helps to put the recent growth numbers into an historical context. It shows the quarterly change in real GDP since the 1980s.

From the chart, we can see the 5-quarter recession that commenced in 1980 Q1 when output shrunk by 4.6 per cent, the 5-quarter recession that commenced in 1990 Q3 when output shrank by 2.4 per cent and the 6-quarter recession that commenced in 2008 Q2 when output shrank by 7.2 per cent. (Click here to download a PowerPoint version of the chart.)

The chart allows to see the other characteristic of growth too: over the long run growth is positive. Since 1980, the average rate of growth per quarter has been 0.57 per cent. This is equivalent to an average rate of growth of 2.3 per cent per year.

Since 2008 Q2, quarterly growth has averaged -0.16 per cent which is equivalent to an annual rate of growth of -0.63 per cent! In any language these are extraordinary numbers and certainly help to put the recent rebound in growth into context.

Data
Quarterly National Accounts Time Series Dataset Q2 2013 Office for National Statistics
Statistical Bulletin: Quarterly National Accounts Q2 2013 Office for National Statistics

New Articles
GDP grows 0.7% as UK economy shows steady recovery Guardian, Phillip Inman (26/9/13)
Hopes of economic recovery take double blow as GDP remains at 0.7% Independent, Russell Lynch (26/9/13)
UK economic growth confirmed at 0.7% BBC News (26/9/13)
IMF cuts global growth outlook but raises UK forecast BBC News (9/10/13)
Good news as IMF upgrades UK’s growth forecast Independent, Ben Chu (8/10/13)
Economy: IMF Makes UK Growth Forecast U-Turn Sky News (8/10/13)

Previous Articles
UK avoided double-dip recession in 2011, revised official data shows Guardian, Phillip Inman (27/6/13)
Britain’s double dip recession revised away, but picture still grim Reuters, David Milliken and William Schomberg (27/6/13)
UK double-dip recession revised away BBC News (27/6/13)
IMF raises UK economic growth forecast BBC News (9/7/13)
IMF raises UK economic growth forecast to 0.9% but cuts prediction for global growth Independent, Holly Williams (9/7/13)
IMF Upgrades UK Growth Forecast For 2013 Sky News (9/7/13)

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at the chart above, summarise the key patterns in real GDP since the 1980s.
  3. What is a recession? What is a double-dip recession?
  4. What are some of the problems with the traditional definition of a recession?
  5. Explain the arguments for and against the proposition that the UK has recently experienced a double-dip recession.
  6. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  7. What factors might result in economic growth being so variable?
  8. Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
Share in top social networks!

When is a recession a recession?

One very important characteristic of economic growth is its short-term volatility. Economic activity is notoriously volatile. It is such a fundamental idea that economists refer to it as one of their threshold concepts. The volatility of growth sees occasional recessions. The traditional definition is where real GDP (output) declines for 2 or more consecutive quarters. The latest figures from the Quarterly National Accounts call into question whether the UK technically experienced a recession at the start of 2012 with output broadly flat in 2012 Q1 following a contraction of 0.1 per cent in 2011 Q4.

The ONS’s latest output numbers raise some interesting questions around our understanding of what constitutes a recession. These figures show that the 2008/9 recession was deeper than first thought with output declining by 7.2 per cent. They show that UK output peaked in 2008Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters where output declined.

Output declined again in 2010 Q4 (–0.2% growth) and again in 2011 Q4 (–0.1% growth). But then interpretations of the data become more controversial. Not least, we get in the debates concerning the accuracy with which we can expect to measure the size of the economy and so to how many decimal places one should realistically measure a rise or fall. In terms of the raw real GDP numbers output fell in 2012 Q1. In 2011 Q4 GDP is estimated at £376,462 billion (at 2010 prices) ‘falling’ to £376,436 billion (at 2010 prices) in 2012 Q1. But, this is a percentage fall only when measured to the third decimal place (–0.007% growth).

In its publication Impact of changes in the National Accounts and economic commentary for Q1 2013 the ONS argue that:

While some commentators may attempt to read some significance into this revision, particularly in the context of whether the UK experienced a “double-dip” recession, it is clearly absurd to imagine that it is possible to measure the size of the economy to this degree of accuracy. The best interpretation of the Blue Book figures is that the economy was flat in the first quarter of 2012, and 0.6% larger than in the same quarter of 2011.

It is however understandable that those with vested interests – including economists, policy-makers and politicians – will take a slightly different view and will read more into the figures than perhaps an objective, sober view might demand. What appears more certain is that output did again fall in 2012 Q2 (–0.5 per cent growth) and in 2012 Q4 (–0.2 per cent growth). Despite estimated growth of 0.3 per cent in 2013 Q1, output remains 3.9 per cent lower than at its 2008 Q1 peak.

Perhaps the ‘absurdity’ or not around the debate of a double-dip recessions strengthens the argument for a more holistic and considered view of what constitutes a recession. In the USA the wonderfully-named Business Cycle Dating Committee takes a less fixed view of economic activity and, hence, of recessions. Its website argues:

It (the Committee) examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).

Of course, the advantage of focusing on real GDP alone in measuring activity and in determining recessions is that it is usually very straightforward to interpret. Regardless of whether the UK has experienced or not two recessions in close proximity, our chart helps to put the recent growth numbers into an historical context. It shows both the quarter-to-quarter changes in real GDP (left-hand axis) and the level of output as measured by GDP at constant 2010 prices (right-hand axis). Click here to download the chart to PowerPoint.

The chart captures nicely the twin characteristics of growth. Since 1960, the average rate of growth per quarter has been 0.63 per cent. This is equivalent to an average rate of growth of 2.55 per cent per year. Since 2008 Q2, quarterly growth has averaged –0.19 per cent which is equivalent to an annual rate of growth of –0.78 per cent! In any language these are extraordinary numbers. Indeed, one could argue that focusing any policy debate around whether or not the UK experienced a double-dip recession rather misses the more general point concerning the absense of any sustained economic growth since 2008.

Data
Quarterly National Accounts Time Series Dataset Q1 2013 Office for National Statistics
Statistical Bulletin: Quarterly National Accounts Q1 2013 Office for National Statistics

Articles
UK avoided double-dip recession in 2011, revised official data shows Guardian, Phillip Inman (27/6/13)
Britain’s double dip recession revised away, but picture still grim Reuters, David Milliken and William Schomberg (27/6/13)
UK double-dip recession revised away BBC News (27/6/13)
IMF raises UK economic growth forecast BBC News (9/7/13)
IMF raises UK economic growth forecast to 0.9% but cuts prediction for global growth Independent, Holly Williams (9/7/13)
IMF Upgrades UK Growth Forecast For 2013 Sky News (9/7/13)

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at the chart above, summarise the key patterns in real GDP since the 1960s.
  3. What is a recession? What is a double-dip recession?
  4. What are some of the problems with the traditional definition of a recession?
  5. Explain the arguments for and against the proposition that the UK has recently experienced a double-dip recession.
  6. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  7. What factors might result in economic growth being so variable?
  8. Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
Share in top social networks!

Consumers to the rescue (or not)

When you are next in town shopping, just keep in mind that consumer spending accounts for a little over 60 per cent of GDP. Therefore, consumption is incredibly important to the economy. How consumers behave is crucial to our short-term economic growth. The second estimate of British growth from the Office for National Statistics shows that the economy expanded by 0.3 per cent in the first three months of 2013. This follows a 0.3 per cent decline in the final quarter of 2012. Real household expenditure rose by just 0.1 per cent in Q1 2013. However, this was the sixth consecutive quarter in which the volume of purchases by households has grown.

The growth in the economy is measured by changes in real GDP. Chart 1 shows the quarter-to-quarter change in real GDP since Q1 2008. (Click here to download a PowerPoint of the chart). During this period the economy is thought to have contracted in 10 of the 21 quarters shown. Furthermore, they show a double-dip recession and so two periods in close proximity where output shrank for two or more quarters. While more recent output numbers are frequently revised, which could see the double-dip recession possibly ‘statistically wiped’ from history, the period since 2008 will always been one characterised by anemic growth. The average quarterly growth rate since Q1 2008 has been -0.12 per cent.

Chart 2 shows from Q1 2008 the quarterly growth in household expenditure in real terms, i.e. after stripping the effect of consumer price inflation. (Click here for a PowerPoint of the chart). Over the period, the volume of household consumption has typically fallen by 0.18 per cent per quarter. Hence, consumption has feared a little worse than the economy has a whole.

While the annualised rate of growth for the economy since Q1 2008 has averaged -0.47 per cent that for consumer spending has averaged -0.73 per cent. However, these figures disguise a recent improvement in consumer spending growth. This is because the volume of consumption has in fact grown in each of the six quarters since Q4 2011. In contrast, the economy has grown in only 2 of these quarters. It is, of course, much too early to start trumpeting consumption growth has heralding better times, not least because the 0.1 per cent growth in Q1 2013 is the weakest number since positive consumption growth resumed at the back end of 2011. Nonetheless, the figures do deserve some analysis by economists to understand what is going on.

A slightly less promising note is struck by the gross fixed capital formation (GFCF) numbers. These numbers relate to the volume of investment in non-financial fixed assets, such as machinery, buildings, office space and fixtures and fittings. Chart 3 shows the quarterly growth in the volume of GFCF since Q1 2008. (Click here for a PowerPoint of the chart). The average quarterly rate of growth over this period has been -0.77 per cent. This is equivalent to an annual rate of decline of 3.9 per cent. GFCF has risen in only 7 of these quarters, declining in the remaining 14 quarters.

Worryingly, gross fixed capital formation has decreased in each of the last three quarters. While these figures may reflect continuing difficulties encountered by businesses in obtaining finance, they may also point to lingering concerns within the business community about the prospects for sustained growth. Therefore, it is important for economists to try and understand the drivers of these disappointing investment numbers and, hence, whether it is these or the slightly better consumption numbers that best hint at our short-term economic prospects.

Data
Second estimate of GDP, Q1 2013 Office for National Statistics
Second Estimate of GDP, Q1 2013 Dataset Office for National Statistics

Articles
UK GDP: concerns about underlying economy as 0.3pc growth confirmed Telegraph, Philip Aldrick (23/5/13)
UK investment fall among worst in G8 Guardian, Phillip Inman (23/5/13)
UK first-quarter growth unchanged BBC News (28/5/13)
U.K. Economy Grows 0.3% on Inventories, Consumer Spending Bloomberg, Svenja O’Donnell (23/5/13)
Surge in consumer spending kept UK out of recession The Telegraph (28/5/13)
Boost in service sector activity The Herald, Greig Cameron (28/5/13)
Hopes dashed as household spending rises by just 0.1% The Herald, Ian McConnell (24/5/13)

Questions

  1. Why do we typically focus on real GDP rather than nominal GDP when analysing economic growth?
  2. What is meant by aggregate demand? Of what importance is consumer spending to aggregate demand?
  3. Why might the patterns we observe in consumer spending differ from those in other components of aggregate demand?
  4. What factors might influence the determination of consumer spending?
  5. What do you understand by gross fixed capital formation? What factors might help to explain how its level is determined?
  6. Of what significance is gross fixed capital formation for aggregate demand and for aggregate supply?
  7. What is a recession? What is a double-dip recession?
  8. What data would you need to collect to identify a recession?
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Fragile and patchy – British economic growth in 2013

In The global economy we note the mixed picture contained within the latest British growth numbers. With the first estimate of growth for Q1 of 2013 pointing to an increase in real GDP of 0.3 per cent, the UK economy appears to have missed the ignominy of a triple dip recession. However, the overall economy remains fragile with different sectors of the economy performing quite differently.

A patchy picture is perhaps the fairest assessment. This helps to explain the quite different perceptions amongst economists, business people, journalists and the wider public about the current state of the economy. Here we consider in a little more detail the growth numbers for the UK from the latest preliminary GDP estimates. (Click here for a PowerPoint of the chart).

The British economy is thought to have grown by 0.3 per cent in the first quarter of 2013. This follows a contraction of 0.3 per cent in the final quarter of 2012. Compared with the first quarter of 2012, the output of the British economy was 0.6 per cent higher. However, as Chart 2 helps to show, the British economy has some way to go before it returns to the levels seen prior to the financial crisis. Real GDP peaked in the first quarter of 2008 when GDP at 2009 prices was estimated at £372.7 billion. In the first quarter of 2013, GDP at constant 2009 prices is estimated at £362.9 billion. This means that the economy is still 2.6 per cent smaller than its 2008-peak. Click here for a PowerPoint of the chart.

The patchy nature of British growth is illustrated nicely by the contrasting rates of growth across the different industrial sectors in the first quarter of the year. While service sector output rose by 0.6 per cent, output across the production industries rose by only 0.2 per cent and agricultural output declined by 3.7 per cent. Within the production industries, mining and quarrying output rose by 3.2 per cent, but manufacturing output shrunk by 0.3 per cent and construction output shrunk by 2.5 per cent.

Chart 3 compares the output of agriculture, the production industries and the service sector between the first quarter of 2008 and the first quarter of 2013. (Click here for a PowerPoint of the Chart). It shows the dramatically different experience of the service sector compared with agriculture and the production industries. While output in the service sector is now 0.8 per cent higher, output across agriculture and the production industries is almost 13.5 per cent lower. Within the production industries, output in mining and quarrying is 38 per cent lower, in the construction sector 19 per cent lower and 10 per cent lower in manufacturing. It is perhaps not surprising then that we get such different messages about the state of the economy. The devil really is in the detail.

Data
Preliminary Estimate of GDP – Time Series Dataset Q1 2013 Office for National Statistics
Statistical Bulletin: Gross Domestic Product Preliminary Estimate Q1 2013 Office for National Statistics

Articles
UK avoids triple-dip recession with better-than-expected 0.3% GDP growth Guardian, Heather Stewart (25/4/13)
UK economy shows 0.3% growth Financial Times, Claire Jones (25/4/13)
UK avoids triple-dip recession with 0.3pc GDP growth Telegraph, Szu Ping Chan (25/4/13)
Osborne claims UK economy is ‘healing’ Financial Times, George Parker and Claire Jones (25/4/13)
UK narrowly escapes triple-dip recession as GDP figures show 0.3% growth in first three months of year Independent, Ben Chu (25/4/13)
UK economy avoids triple-dip recession BBC News (25/4/13)

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. How would we identify a recession in either of the first two charts?
  3. What is a double-dip recession? What is a triple-dip recession?
  4. The UK economy in Q1 2013 was 2.6 per cent smaller than in Q1 2008. What factors do you think help explain why after 5 years UK real GDP is still lower?
  5. Why if output in the production and agricultural sectors is 13.5 per cent lower in Q1 2013 compared to Q1 2008 is the economy’s total output only 2.6 per cent lower?
  6. Economic growth rates fluctuate quite significantly. Can economic theory help to explain why this is the case?
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The 2 Ds of British recessions

We know two things about economic growth in a developed economy like the UK: it is positive over the longer term, but highly volatile in the short term. We can refer to these two facts as the twin characteristics of growth. The volatility of growth sees occasional recessions, i.e. two or more consecutive quarters of declining output. Since 1973, the UK has experienced six recessions.

Here we consider in a little more detail the growth numbers for the UK from the latest Quarterly National Accounts, focusing on the depth and duration of these six recessions. How do they compare?

The latest figures on British economic growth show that the UK economy grew by 0.9 per cent in the third quarter of 2012. However, when compared with the third quarter of 2011, output was essentially unchanged. This means that the annual rate of growth was zero. Perhaps even more telling is that output (real GDP) in Q3 2012 was still 3.0 per cent below its Q1 2008 level.

The chart helps to put the recent output numbers into an historical context. It shows both the quarter-to-quarter changes in real GDP (right-hand axis) and the level of output as measured by GDP at constant 2009 prices (left-hand axis). It captures nicely the twin characteristics of growth. Since 1970, the average rate of growth each quarter has been 0.6 per cent. This is equivalent to an average rate of growth of 2.35 per cent per year. The chart also allows us to pin-point periods of recessions.

One way of comparing recessions is to compare their ‘2 Ds’: depth and duration. The table shows the number of quarters each of the six recessions since 1973 lasted. It also shows how much smaller the economy was by the end of each recession. In other words, it shows the depth of each recession as measured by the percentage reduction in output (real GDP).

British recessions

Duration (quarters) Depth (output lost, %)
1973Q3–74Q1 3 3.25
1975Q2–75Q3 2 1.76
1980Q1–81Q1 5 4.63
1990Q3–91Q3 5 2.93
2008Q2–09Q2 5 6.28
2011Q4–12Q2 3 0.90

We can see that three of the recessions lasted for five quarters. In the case of the recessions starting in 1975 and 2011 they occurred very shortly after a previous recession. Hence, we observe two so-called double-dip recessions.

The table reveals that the deepest recession by some distance was that in the late 2000s. As a result of this recession, UK output declined by 6.3 per cent. As the recent GDP numbers show, the UK has yet to recover the ‘lost output’ that followed the financial crisis.

Data
Quarterly National Accounts Time Series Dataset Q3 2012 Office for National Statistics
Statistical Bulletin: Quarterly National Accounts Q3 2012 Office for National Statistics

Articles
UK economic growth less than expected Sky News UK(21/12/12)
GDP growth revised down to 0.9% Financial Times, Claire Jones (21/12/12)
Uk borrowing higher than expected as GDP revised down BBC News (21/12/12)

Questions

  1. What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
  2. Looking at the chart above, summarise the key patterns in real GDP since the 1970s.
  3. What is a recession? What is a double-dip recession?
  4. Looking at the table, rank the recessions from 1973 by the amount of lost output.
  5. Can a recession occur if nominal GDP is actually rising? Explain your answer.
  6. What factors might result in economic growth being so variable?
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A positive turn of events?

The story of the UK economy over the past few years has been one of bad news and worse news. With a double-dip recession having kept confidence low in the UK, positive news for the economy was seemingly a distant hope of government ministers. However, official statistics show that that in the 3 months from July to September, the UK economy emerged from recession, with growth of 1.0%.

This positive GDP figure (click here for a PowerPoint of the chart below) was undoubtedly helped by the London Olympics over the summer, which may have added as much as 0.2 percentage points to GDP, according to the ONS. Millions arriving in London and other venues, spending money on countless things. Yet, other factors have also contributed to this welcome growth. Stephanie Flanders said:

The positive ‘surprise’ in these figures is largely to be found in the service sector, which is estimated to have growth by 1.3% in the third quarter, after shrinking by 0.1% in the three months before.

Further to this, in Stephanie Flanders’ ‘Stephanomics’, she says that ‘it confirms that the last three months of this latest recession were brought to you by the Queen. Or at least, the extra Bank Holiday to celebrate her Jubilee.’ The Bank of England suggests that the Jubilee took 0.5 percentage points from official GDP statistics. So, the news so far is positive, but the economy is far from being back to its pre-recession size.

The 2008-2009 recession knocked 6.4% off the UK economy. Since then, the total growth (over the past 4 years) has reached only half of that – 3.2% and that includes the 1% figure just published. Thus, while we may be on ‘the right track’, there is still a long way to go. Economists differ in their interpretations of what this means for the overall recovery: some say that this is a sign of what’s to come; others argue that this recovery has been driven by one-off factors.

What is certain is that government policy over the next few months will be crucial in keeping the economy on the right growth path. The following articles consider the implications of this new economic data.

A special recovery BBC News, Stephanomics, Stephanie Flanders (25/10/12)
UK GDP rises 1pc: economist reaction The Telegraph (25/10/12)
Nick Clegg warns economic recovery will be ‘fitful’ The Guardian, Daniel Boffey (28/10/12)
GDP figures set to show UK economy has exited double-dip recession The Telegraph, Philip Aldrick, Emma Rowley and Jessica Winch (25/10/12)
UK economy returns to growth with help from Olympics BBC News (25/10/12)
U.K. posts quarterly gain in GDP, lifted by Olympics Wall Street Journal, Cassel-Bryan Low (25/10/12)
GDP figures show UK emerging from recession: full reaction The Guardian (25/10/12)
UK growth signals move out of recession Financial Times, Sarah O’Connor and George Parker (25/10/12)

Questions

  1. How do we define a recession?
  2. How is GDP calculated and what does it measure?
  3. Which factors have contributed towards lower GDP data towards the beginning of this year?
  4. Which factors have helped boost GDP in the 3 months from July to September?
  5. Why is there disagreement about the likelihood of positive GDP figures continuing throughout the rest of the year?
  6. Prior to the official release of the GDP figures, David Cameron hinted at positive news. Given that the market is so sensitive, what effect might this suggestion have had?
  7. Given this positive figure, what implications does this have for the government’s quantitative easing programme?
  8. If we translate this latest growth data onto an AD/AS diagram, how would you show what has recently happened?
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Down, down, deeper and down

New data released on 25/7/12 by the Office for National Statistics showed that the UK economy shrank by a further 0.7% in the second quarter of 2012. This makes it the third quarter in a row in which GDP has fallen – and it is the steepest fall of the three. Faced with this, should the government simply maintain the status quo, or does it need to take new action?

The construction sector declined the most steeply, with construction output 5.2% down on the previous quarter, which in turn was 4.9% down on the quarter previous to that. The output of the production industries as a whole fell by 1.3% and the service sector fell by 0.1%. (For a PowerPoint of the following chart, click here.)

The immediate cause of the decline in GDP has been a decline in real aggregate demand, but the reasons for this are several. Consumer demand has fallen because of the squeeze on real wages, partly the result of low nominal pre-tax wage increases and partly the result of inflation and tax rises; the government’s austerity programme is holding back a growth in government expenditure; export growth has been constrained by a slowing down in the global economy and especially in the eurozone, the UK’s major trading partner; and investment is being held back by the pessimism of investors about recovery in the economy and difficulties in raising finance.

So what can be done about it?

Monetary policy is already being used to stimulate demand, but to little effect (see Pushing on a string. Despite record low interest rates and a large increase in narrow money through quantitative easing, broad money is falling as bank lending remains low. This is caused partly by a reluctance of banks to lend as they seek to increase their capital and liquidity ratios, and partly by a reluctance of people to borrow as individuals seek to reduce their debts and as firms are pessimistic about investing. But perhaps even more quantitative easing might go some way to stimulating lending.

Fiscal policy might seem the obvious alternative. The problem here is that the government is committed to reducing the public-sector deficit and is worried that if it eases up on this commitment, this would play badly with credit rating agencies. Indeed, on 27/7/12, Standard & Poor’s, one of the three global credit rating agencies, confirmed the UK’s triple A rating, but stated that “We could lower the ratings in particular if the pace and extent of fiscal consolidation slows beyond what we currently expect.” Nevertheless, critics of the government maintain that this is a risk worth taking.

The following articles look at the causes of the current double-dip recession, the deepest and most prolonged for over 100 years. They also look at what options are open to the government to get the economy growing again.

Articles
Britain shrinks again The Economist (25/7/12)
Shock 0.7% fall in UK GDP deepens double-dip recession Guardian, Larry Elliott (25/7/12)
UK GDP figures: expert panel verdict Guardian, Frances O’Grady, Will Hutton, Sheila Lawlor, Vicky Pryce and John Cridland (25/7/12)
GDP shock fall: UK growth in 2012 ‘inconceivable’, warn economists The Telegraph, Angela Monaghan (25/7/12)
UK recession deepens after 0.7% fall in GDP BBC News (25/7/12)
UK economy: Why is it shrinking? BBC News (25/7/12)
UK GDP: A nasty surprise and a puzzle BBC News, Stephanie Flanders (25/7/12)
Tough choices for Mr Osborne BBC News, Stephanie Flanders (26/7/12)
David Cameron in pledge to control UK’s debt Independent, Andrew Woodcock and James Tapsfield (26/7/12)
David Cameron defends economic policies BBC News (26/7/12)
The GDP number is awful – and it’s the product of the Government’s amateur policies, not the euro crisis The Telegraph, Thomas Pascoe (25/7/12)
UK recession: have we heard it all before? Guardian, Duncan Weldon (25/7/12)
US economic growth slows in second quarter BBC News (27/7/12)
GDP data trigger debate on economy Financial Times, Norma Cohen and Sarah O’Connor (25/7/12)
Does weak UK growth warrant more QE? Financial Times (25/7/12)
The recession: Osborne’s mess Guardian editorial (25/7/12)

Data
Gross Domestic Product, Preliminary Estimate, Q2 2012 ONS (25/7/12)
Preliminary Estimate of GDP – Time Series Dataset 2012 Q2 ONS (25/7/12)

Questions

  1. What are the causes of the deepening of the current recession in the UK?
  2. Search for data on other G7 countries and compare the UK’s performance with that of the other six countries (see, for example, the OECD’s StatExtracts.
  3. Compare the approach of George Osborne with that of Neville Chamberlain in 1932, during the Great Depression.
  4. Does weak UK growth warrant more quantitative easing by the Bank of England?
  5. To what extent can fiscal policy be used to stimulate the economy without deepening the public-sector deficit in the short term?
  6. What is meant by ‘crowding out’? If fiscal policy were used to stimulate demand, to what extent would this cause crowding out?
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Roller coaster ride: or just bumping along the bottom?

The UK is officially back in recession: or to be more accurate, a double-dip recession.

The generally accepted definition of a recession is two or more quarters of negative growth in real GDP. According to figures released by the Office for National Statistics, the UK economy shrank by 0.2% in quarter 1, 2012, having shrunk by 0.3% in quarter 4, 2011.
(Click on the following link for a PowerPoint of the above chart: Double dip 2)

As you can see from the chart (click chart for a larger version), these declines are tiny compared with the recession of 2008/9. Nevertheless, with the eurozone economy slowing (Britain’s largest export market), and with cuts to government expenditure set to bite harder in the coming months, there are worries that there may be more quarters of negative growth to come.

So what are the causes of this double-dip recession? Are they largely external, in terms of flagging export markets; or are they internal? Is the new recession the direct result of the tight fiscal policy pursued by the Coalition government?

And what is to be done? Is there no option but to continue with the present policy – the government’s line? Or should the austerity measures be reined in? After all, as we saw in the last blog post (Economic stimulus, ‘oui’; austerity, ‘non’), the mood in many European countries is turning against austerity.

The following articles explore the causes and policy implications of the latest piece of bad news on the UK economy.

Articles
Double-dip recession a terrible blow for George Osborne Guardian, Larry Elliott (25/4/12)
Double-dip recession figures mark another bad day for George Osborne Guardian, Larry Elliott (25/4/12)
UK double-dip recession: what the economists say Guardian (25/4/12)
Feared double dip recession becomes reality as British economy contracts again in first quarter of 2012 Daily Record (25/4/12)
Britain in double-dip recession as growth falls 0.2pc The Telegraph, Angela Monaghan and Szu Ping Chan (25/4/12)
Did the eurozone crisis cause the double-dip recession? Guardian, Polly Curtis (25/4/12)
UK’s double-dip recession Financial Times, Chris Giles (25/4/12)
UK is in ‘double dip’ recession FT Adviser, Rebecca Clancy and John Kenchington (25/4/12)
Flanders explains GDP figure BBC News, Stephanie Flanders (25/4/12)
No recovery for UK: No let up for ONS BBC News, Stephanie Flanders (25/4/12)
Double-dip recession: There’s always fantasy island BBC News, Paul Mason (25/4/12)
UK double-dip recession to drag on into summer, economists warn The Telegraph, Philip Aldrick (26/4/12)
George Osborne can stop the rot, but only by spending as he slashes The Telegraph, Jeremy Warner (25/4/12)
Double dip has arrived – and Osborne is running out of escape routes Independent, Ben Chu (26/4/12)
Britain’s bosses tell the ONS: it’s bad, but not a recession Independent, Tom Bawden, Lucy Tobin , Gideon Spanier (26/4/12)
The Chancellor received plenty of warning Independent, David Blanchflower (26/5/12)

Data
Gross Domestic Product: Preliminary Estimate, Q1 2012 ONS (25/4/12)
Preliminary Estimate of GDP Time Series Dataset 2012 Q ONS (25/4/12)
World Economic Outlook Database IMF (17/4/12)
Business and Consumer Surveys (for all individual EU countries and for the EU as a whole) European Commission: Economic and Financial Affairs
Consumer Confidence Nationwide Building Society

Questions

  1. Assess the current state of the UK economy and its likely course over the coming few months.
  2. Why may looking at the business surveys provide a truer picture of the state of the UK economy than the official measure of GDP?
  3. Why has the UK economy gone back into recession?
  4. Compare the policy approaches of the Coalition government with those of the Labour opposition.
  5. How important is it for the UK to retain its AAA credit rating?
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