Is Britain on the edge of recession? History is an unreliable guide

Concerns are growing about a marked slowdown in the UK economy. The Lloyds Bank purchasing managers’ index, for example, fell to 52.1 in April, its lowest point since 2013. The initial estimate for GDP, total output, in the first quarter of this year shows an increase of just 0.4 per cent on the final quarter of 2015.

Growth since the start of 2015 has been only 2.1 per cent, a rate which is a rough benchmark as to whether employment rises or falls. Indeed, in February, the latest month for which we have data, the Labour Force Survey showed that the total number of jobs in the UK was unchanged since December.

On the positive side, the economy has definitely grown since the recession, with output being up by 7.3 per cent on its previous peak value just before the recession in the first quarter of 2008. And these are the official estimates, which may not be able to cope with measuring accurately activity in the new cyber economy.

But economic slowdowns and recessions do happen. Indeed, they are a fact of life. The upsurge in inflation in the 1970s, when it reached 25 per cent, captured the mind-sets of policy-makers and prevented them from realising that low inflation, which we have now had for over 20 years, is normal. In the same way, the long period of continuous expansion during the 1990s and 2000s distorted expectations about what is normal. This period, which economists dub the Great Moderation, during which Gordon Brown claimed he had abolished boom and bust, makes people think, incorrectly, that recessions are very unusual.

We have quarterly GDP data in the UK going back to 1955. Economists have a fairly arbitrary definition of a recession as being at least two successive quarters of negative growth. Since 1955, we have had eight such periods. So, on average, we have a recession once every seven or eight years. We had one in 2008-09, and we might think that, on the law of averages, one is due now.

Things are not so simple. Economists write about the “business cycle”, as though the fluctuations in economic growth were regular. But this is a piece of jargon. The Nobel Laureate Robert Lucas pointed out 40 years ago that the key feature about economic ups and downs is that most sectors of the economy tend to move together, so we can presume there are general factors driving the economy. Specific factors will influence specific industries, but these do not cause the economy as a whole to boom or shrink.

The gaps between recessions are in fact pretty irregular. For example, there was one in 1956 and another in 1957. The recession of 1973 was followed quickly by the one in 1975. In contrast, there was a gap of 17 years between the 1990-91 contraction and the financial crisis.

Decision-makers do not like uncertainty, and Brexit is certainly creating this. Capital spending by companies stopped growing in the late summer of 2015. So it might all bounce back after 23 June.

Paul Ormerod

As Published in City AM on Wednesday 12th May 2016

Image: Pound Coin by Andrew Writer licensed under CC by 2.0

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.