Tomorrow the papers will be flooded with news that the UK entered a recession at the end of 2023

In times when the economy appears to be slowing, commentators will inevitably debate whether or not it is moving into ‘recession’. There is, however, no official definition of a recession and the one most commonly used has the potential to be misleading. 

GDP does not decide an ‘official recession’ – and neither do the newspapers.

The popular definition of a recession is usually considered to be at least two consecutive quarters of economic contraction – or ‘negative growth’ – in Gross Domestic Product (GDP).  

However, this rule of thumb definition was not the result of detailed analysis by academics and it has no official status. Even the origin of this definition is a little unclear. Its originator is thought to be the then head of the United States Bureau of Labour Statistics, Julius Shiskin, when writing a simplified definition for readers in the New York Times in 1974. This is what modern commentators and policymakers like to call a ‘technical recession.’ 

In the first two quarters of 2022 US economic output contracted at a -2% annual rate from January through March and at a -0.6% annual rate from April through June. However, it was not declared a recession due to the low unemployment, strong retail sales, industrial production and high wage growth.

2.6% over two quarters, and not declaring a recession, makes the -0.2% potential contraction in the UK seem rather trivial – yet we are sure that the papers will shout recession from the rooftops.

The 3rd quarter in 2023 was -0.1%, and the 4th quarter may well come in at -0.1%. Does this make it a recession?

Several things are needed for a recession to feel like, well, a recession; high unemployment and lower wages are just 2.

This week the release of UK unemployment show the rate actually reduced to 3.8% rather than increasing from 3.9% to 4% as expected.

On top of that, average earnings came in at 5.8%,higher than the 5.6% expected. This is the lowest it has been in 17 months, but still much higher than the 4% inflation number expected on Wednesday morning.

Using CPI real earnings, from August to October 2023, total pay rose by 1.2% on the year. The last time growth was higher than this was in August to October 2021 when it was 1.5%. Regular pay rose by 1.2% on the year; growth was last higher in July to September 2021 when it was 2.2%.

We always hear when wage growth is below inflation(lower real earnings) but why are we not hearing about how they are now much higher? Is it that good news in the UK just doesn’t sell so, who cares about the truth?

Are we in a recession if wages are outpacing prices, and unemployment is close to its all-time low?

In the US, the National Bureau of Economic Research decide a recession and ‘a downturn must be deep, pervasive, and lasting’ to qualify as a recession by the NBER's definition, but these calls come after the fact: It is not a clear formula to identify a recession as soon as one begins.

Sometimes a ‘technical’ recession could just be a lack of growth. 

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It is difficult to have a rigid, formal definition of what does or does not constitute a recession. If an economy shrinks by 0.1% for two quarters running, but in the quarters either side grows strongly, is this really a recession or perhaps just a lack of GDP growth for particular one-off reasons? 

Likewise, how best can we take account of the severity and length of recessions, which vary widely. The modest downturn in UK growth seen in 1991, for example, is clearly of a different magnitude to that of the Great Depression or the 2008-09 global financial crisis. 

Or, as previously mentioned, what happened in the United States in 2022, when GDP contracted but other metrics – such as wages and employment – continued to show economic strength, can we really say that is a recession either?  The US didn’t, but it would seem the UK would.

Small revisions do not change the big picture.

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Another point to consider is revisions. GDP is a broad estimate of economic activity based on the data available at the time.  It is, though, subject to revision as more data becomes available.  The ONS’s revisions tend to be small and unbiased in either direction so a small revision in quarterly growth would be within normal expectations. However, it is plausible that a very small rise or fall in growth from initial estimates could be revised in the opposite direction once further data are received. 

Such revisions have not really changed our understanding of the economy. But over-reliance on a binary definition of recession might suggest that the difference between growth of 0.1% and a minus0.1% contraction is that between economic salvation and disaster.  Clearly it is not.  

Of course, during the Covid pandemic of 2020 and 2021, when we saw record falls in GDP, I don’t think many people would challenge the supposition that the economy was in recession. In that sense, we know a recession when we see one. But often there is not such a clear line. 

As such the ONS avoid defining when the UK may or may not be in recession and instead focus on where there are strengths and weaknesses in the economy, how these compare to historic trends and, where necessary, when there are uncertainties in estimates.

Lloyds Bank, Nomura, ING Bank NV, Investec and NatWest all expect a contraction and ‘recession’. UBS, Oxford Economics, Merrill Lynch, Credit Agricole and KPMG all see no change or a small gain in the quarter.

Is that 0.1% really a recession maker? Factually, it isn’t. But according to the British press, it may well be.

Don’t be too alarmed when/if you read about it towards the end of the week. Nothing has really changed. Unemployment is low, wage growth is strong (too strong if anything), and the economy is ticking over just fine.

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