Is the UK Really in Recession?
Isn’t it wonderful? Greece has been out of the limelight for a few weeks so we have had the luxury of addressing topics other than the euro zone. Normal service will be resumed fairly shortly I’m sure, but in the meantime we stay close to home and today consider the importance of statistics.
The UK was described as suffering from a “double-dip” recession when its fourth quarter 2011 and first quarter 2012 GDP numbers were reported as negative.
My own humble leading economic indicator model suggests a negative GDP number for the second quarter as well (initial estimate out today is expected to be around -0.2 percent), so it looks like we can write off most of 2012. (At this point I renew my fervent and oft-repeated desire for the government to address labor market reforms and implement a 1-year freeze on employer payroll taxes for all new hires).
But is the UK really in recession? In the six-month period that that the guilty stats refer to, the UK has reduced unemployment by over 200,000 and seen its unemployment rate fall from 8.6 percent of the workforce to 8.1 percent. Hardly what one expects in a recession. Are the GDP numbers suspect? One could be forgiven for thinking so. While I was deservedly set upon by my chums when I said that fourth quarter GDP would be revised upwards to flat, when it was in fact revised further downwards, I am still not entirely convinced that the figures are an accurate picture of the UK economy.
Commentators such as David Smith at The Sunday Times have suggested that (among other things) the GDP calculation is biased towards construction, and that a contraction in activity there has been overshadowing increased activity elsewhere. He may well have a point. All I would say is that economies in recession don’t tend to create jobs. Is it Olympics related? Almost definitely, but the fall in unemployment is not down solely to 2012.
The problem with inaccurate statistics is that they become self-fulfilling, thus rendering themselves accurate by proxy. When economic activity is deemed to be contracting companies hold off on investment, included badly-needed new staff hiring, and government policies become misdirected or misallocated.
The BoE increased its quantitative easing by 50 billion pounds ($77.5 billion) this month, which it almost certainly would not have done had the first quarter number been positive, or even flat. But what alternative statistic is there? Everyone from the housewife in the supermarket to the multinational with a London HQ is making decisions based on an understanding of the UK being in recession and seemingly a long way from recovery.
Initial GDP estimates are revised twice shortly after first publication, and revised again much later. GDP estimates for the period in 2008-2009, when the UK was undoubtedly in recession, were shown to be much worse than they actually were once they were revised. One could say that the first published estimate is almost a form of misinformation.
Mr. El-Erian’s “new normal” is worthy of a name change: it’s now just “normal”, and we can expect low levels of growth for the next 5 years, on both sides of the Atlantic. But there is a world of difference between sluggish growth bumping along the bottom and a stagnating economy that is supposedly contracting in output. It’s time to do away with the first GDP estimate number, and only publish much later what is now the second revision, or for people to start ignoring these stats altogether and start making investment decisions purely on their own merit. Easier said than done of course…
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.
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