Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 21 December 2016

When is an economic recovery not a recovery?

This post may seem to be unusually pedantic, but please be patient

What do we mean when we say the economy is recovering from a recession? Do we mean it has started growing again, or do we mean it is returning to its pre-recession trend? Brief research suggests there is no standard definition, but Wikipedia is clear it is the latter:
“An economic recovery is the phase of the business cycle following a recession, during which an economy regains and exceeds peak employment and output levels achieved prior to downturn. A recovery period is typically characterized by abnormally high levels of growth in real gross domestic product, employment, corporate profits, and other indicators.”

The second sentence is crucial here. All economies grow on average: they have a positive trend growth rate. An economic downturn (or worse still a recession) involves the economy dipping below trend (or in a recession not growing at all). Typically whenever that has happened in the past, most economies make up for the growth they lost in the downturn, by growing more rapidly than trend once the downturn is over. This had certainly been true for the UK. We expect economies to grow over time because of technical progress, so it seems almost obvious that a recovery must involve above average growth until we return to something like an underlying trend.

Imagine a 5,000 metres race. Suppose an athlete trips and stumbles, leaving the main pack behind. If 5 minutes later I said the athlete was recovering, would you think this meant that they were getting back to their previous pace but still well behind the main group, or that they were getting back in touch with the main pack? I suspect you would think it meant the latter, and you would call a complete recovery when they were back within the main group. If you think about the main group as the underlying trend path of the economy, then a recovery in growth means getting back towards this trend path.

For this reason I would define a recovery from recession as above trend growth, and I think most macroeconomists would do the same. Here is recent quarterly growth in UK GDP per head.

The red line is the pre-crisis trend growth rate. You can see from this that only 2014 could possibly be called a recovery, and even that is a bit of a stretch. The UK is far from unique in this respect, but unlike other countries the UK economy has a pretty clear and unchanged trend growth rate since the 1950s. Until now that is. This global lack of recovery begs many important questions, which those who read economics blogs will be very familiar with: has the financial crisis had a permanent negative effect on productive potential, was the pre-crisis period really a disguised boom, are we suffering from secular stagnation, what role did austerity play?

Yet all of these important issues are sidelined in popular discussion if we misuse the term recovery, and instead describe any positive growth after a recession as a recovery. This is not a problem for economists, who tend to talk numbers, but it does matter for the public debate. I cannot help feeling that calling any positive growth after a recession a recovery also adds to a sense of disconnect people have, particularly when (as in the UK) there has really been a recovery in employment, such that productivity has been virtually flat. People ask how come there has been a recovery and yet my wages are still so much lower in real terms than they used to be?.

When the underlying trend may have slowed or shifted, then it becomes difficult to know what is or is not a recovery, but that is no reason to misuse the term. When we are talking about the past, then things should be clear. Here is the same data for 1981.

It is obvious from this data that the recovery from the 1980 recession only really began in 1983. The two previous years saw as many periods of below trend growth as above trend growth: given normal growth, the economy was effectively standing still. Unless, of course, you have a political point to prove. In 1981 the Conservative government of Margaret Thatcher raised taxes substantially in the Spring Budget, despite just seeing 5 quarters of falling output per head. They increased taxes after falling output because they wanted to reduce the budget deficit. 364 academic economists quickly wrote a letter denouncing the policy - a Brexit like majority at the time.

In 2006 Philip Booth of the Institute of Economic Affairs wrote this:

“The economic recovery that the 364 said would not happen began more or less as soon as the letter appeared.”

This sentence has been repeated time after time by right wing economists and politicians: so often that it is now repeated as fact by BBC journalists. It has become what I call a politicised truth: something that is false but is perceived to be true by journalists who talk to politicians but not academics. And the statement that the recovery began as soon as the letter appeared is simply false if you use the term recovery properly: the recovery began a year and a half later. Had fiscal policy not been tightened in the 1981 budget, the recovery might have begun earlier than the end of 1982. In that sense, the economists were vindicated by subsequent events.

In 2010, George Osborne was warned by many academic economists - almost certainly a majority at the time - that embarking on austerity so soon after the recession was folly. But, just as in 1981, he wanted to reduce the deficit. It is not difficult to imagine that as he pondered these warnings from academics, he thought to himself that Margaret Thatcher got the same advice in 1981 and everything he had read said the advice was wrong because the recovery started immediately after taxes were increased. He would have been emboldened to do the same, with what we now know were disastrous consequences. Just two years later, GDP per head had lost another 3% or more relative to trend.

This is partly a story about the dangers of propaganda that you begin to believe yourself. But it is also about the potential ambiguity of one single word: recovery.


  1. The Real Business's Cycle theory differs broadly from neoclassical growth theory though. Boom and bust according to certain theorists occur intermittently in both theories however. Which one do you advocate?

  2. Political journalists at the BBC have so much to answer for: there is little if any economic knowledge necessary to have anticipated what the word 'fairness' in the hands of Iain Duncan Smith would become after 2010.

    A man and Party mocked by those selfsame journalists in the 2000s suddenly was able to use the same bigotries to advance the same cause in the 2010s because BBC journalists stood by and let it happen.

  3. You could sidetrack the problem with nowcasting models. Then, you would have very straightforward answers when someone asks whether or not this or that new datum signals a recovery or the beginning of a recession. People would have an easier time understanding an answer like "our best models say x is very likely" than a tedious discussion that justifies an expert judgement.

  4. Pedantry indeed.

    " most UK economies make up for the growth they lost in the downturn, by growing more rapidly than trend once the downturn is over."

    How many economies does the UK have?

  5. Too right. Cameron and Osborne were the two drongos whose political incompetence and misbegotten fleece the poor austerity programme were the main spur to Brexit.

  6. Philip Booth is not a serious person. Ray Barrell is a serious person and has written: 'If fiscal policy had not been tightened in the spring of 1981, growth would have been faster that year, and the output gap would have closed more quickly...the recovery into 1982 was led by domestic investment, but the turnaround from a fall in business investment of 7 per cent in 1981 to growth of 4 per cent in 1982 might be seen as the normal exit from a recession' (in Needham and Hotson, 2014, p. 197.

  7. I think you raise a very important point here.

    If you look at secular demographic trends and the slowing of technical progress (see Robert Gordon: The Rise and Fall of American Growth) I think there is a case for saying that the secular trend rate of growth has declined. The word "stagnation" is a pejorative term that does not capture what I believe is a natural variation in the rhythm of the growth cycle.

    Using common sense how reasonable is it to assume a constant trend rate year in and year out when the two main driving factors, demography and technical progress, must be subject to change?

    If this is indeed the case does it not mean that both macroeconomic and monetary policy are targeting the wrong trend growth rate?

  8. Dear Simon Wren-Lewis,

    I am writing to request your permission to republish your latest blog-post "When is an economic recovery not a recovery" in Financial Nigeria magazine and website. Financial Nigeria focuses on development and finance.

    This article is very pertinent to the falsehood that Nigeria faces economic recovery and growth in 2017, after the recession of 2016.

    Nigeria has had a trend growth rate of 6 percent before the slump in 2015 and the recession in 2016. Although the 2017 budget proposal, now before the parliament, projects 2.5% GDP growth rate in 2017, the budget was nevertheless dubbed "The Budget of Recovery and Growth."

    The matter goes farther than ignorance. As you have so astutely noted, it reflects the disturbing politicization of truth by the novice Nigerian APC government of President Muhammadu Buhari.

    I hope a wide exposure to your post by Nigerian policymakers who read our publications will get the conversation about the budget more serious.

    I will observe to acknowledge both the writer and source (your blog), if you grant the republish permission. My email address is

    Thank you.

    Jide Akintunde
    Managing Editor, Financial Nigeria.

  9. But "austerity" has not happened overall in the UK since 2010, because a wildly expansionary overall policy has just become somewhat less expansionary. Large (if less large than in the past) fiscal and trade deficits, booming asset prices and immigration confirm that.

    While the overall policy is still quite expansionary, the impact of policy has changed significantly: big falls in government intervention (mostly fiscal) that helps low income residents (Labour voters...) and significant boosts to government intervention (mostly monetary) in favour of higher income and wealthy voters (Conservatives...). Contractionary policy for some and expansionary policy for others don't make for overall austerity. The issue is not economic policy, it is politics.

  10. A patient recovering from an illness - is that a valid analogue?

  11. Thinking about recovery, it might be helpful to remind yourself of when you last had flu

  12. «The red line is the pre-crisis trend growth rate. [ ... ] unlike other countries the UK economy has a pretty clear and unchanged trend growth rate since the 1950s. Until now that is.»

    But there were two huge regime changes in that period: in 1980 the UK became a net oil exporter, and a huge debt-fueled boom began, as policy-makers were then able to expand credit to have at the same time a Barber-style consumption debt boom and a Lawson-style property debt boom, while having a strong pound; which situation reached a peak during New Labour. Then in 2007 oil the UK became a net oil importer again.

    This is reflected in the overall "productivity" stagnation reported in this post by C Dillow:
    «why we are not talking about the crisis of stagnant productivity all the time»

    and analyzed as to its sectoral components in this one by F Coppola:
    «Notice when productivity started to slump. It was much earlier than 2008. In fact the data (which ONS have helpfully provided in Excel) show that output per hour started to fall in Q4 2006.»
    «The UK's massive productivity growth from 1990-2006 was due to oil, not financial services. Even energy utilities downstream from North Sea Oil had a greater productivity rise than financial services. And both oil and utilities suffered a massive collapse.»

    It is pretty clear that post-2008 it is not "business as usual" for the UK, and that more generally the 1995-2007 period for several debt-fueled advanced economies was not part of trend, but an outlier, for example for the USA, figure 5 here:
    «real GDP before the mid-1990s and after mid-2009 (the end of the recession) fall nicely along the trend-line estimate of “potential.” Hence, relative to the trend line, the behavior of real GDP during the 1995-to-mid-2009 period is an anomaly.»

    It would be exceedingly nice if some miracle policy were found that restored growth to the level it had when the UK was a net oil exporter, even if debt and oil asset extraction dwindle. I am sure that other countries like Norway, or even Saudi Arabia, would love to hear of it.

    But "austerity" was usually and properly associated in the 60s and 70s with the trade balance, not with government deficits or above-trend growth: the idea then was that explicitly targeting lower GDP-per capita and even GDP growth would lead to lower demand for imports: deliberate demand suppression, "belt tightening", the "stop" phase of the famous "start-stop". Currently the trade deficit of the UK is quite large, and thus (and for other reasons) "austerity" seems an inappropriate description.

    While *aggregate* "austerity" is not happening (yet), it is easy to see instead that there is *selective* demand suppression, as policy impact is to push down the incomes and consumption (and thus imports) of the "parasitic exploitative" lower classes and boost those of the "wealth creating" property rentier middle and upper classes.

    Redistribution rather than "austerity", and the calls for policies against "austerity" often come from neoliberal Economists who want much bigger asset price growth that might "trickle down", but usually does not, leading to even greater redistribution.
    «And properly skilled courtier-technocrats should be able to make the argument that the economic health of America requires a slightly more upward trajectory over time in asset prices»

  13. 'As Smallwood points out, the Treasury and Bank drew the wrong conclusion from the apparent success of the combination of fiscal contraction and monetary expansion in the 1980s and 1990s. "In both cases, the contractionary impact of tax rises and spending cuts was counterbalanced by substantial falls in interest rates, and of the sterling exchange rate at a time when our export markets were growing," he writes. Exports and investment took up the slack left by budgetary cuts.'

  14. "In 2010, George Osborne was warned by many academic economists - almost certainly a majority at the time - that embarking on austerity so soon after the recession was folly. But, just as in 1981, he wanted to reduce the deficit. It is not difficult to imagine that as he pondered these warnings from academics, he thought to himself that Margaret Thatcher got the same advice in 1981 and everything he had read said the advice was wrong because the recovery started immediately after taxes were increased. He would have been emboldened to do the same, with what we now know were disastrous consequences. Just two years later, GDP per head had lost another 3% or more relative to trend."

    'He' believed in the new voodoo economics?
    The Barro/Ricardo equivalence proposition?

  15. The problem is the academics who disagree are "dealt with."

    One aspect is that Finance and Economics faculty deans are always looking for donations, and in particular for big endowments from very wealthy donors. It does not look good if anybody in the faculty overtly supports research that hints that the very wealthy donor made money like a bandit because. Deans have influence over tenure committees, and no member of those committees is likely anyhow to be grateful to an idiot who upset a potential large donor.

    One of the most amusing examples of this is that Ken Lay of Enron endowed 35 chairs in Economics and Finance and Accounting (ehehehehe!).

    So the only practical options for people who realize that the usual verities are weak may be:

    * Publish absolutely standard useless verbiage and then do a complete turnabout when you get your tenured chair (or endowed chair).

    * Bury your actual research in technical jargon so thick that it is not obvious that it deviates from the standard truthiness.

    * Do your career at second-echelon or foreign instutitions that are not constantly competing for big-sum endowments from very wealthy donors.

    * Make a lot of money in finance/trading/consulting and then write about your dissonant research after becoming independently wealthy.

    There is BTW not just the mechanism of greedy deans policing their faculty to make sure they don’t deter big contributions from very wealthy donors by deviating from the standard truthiness: as reported in an appendix to a business book called “High stakes, no prisoners” most famous Economics professors make most of their money, becoming wealthy millionaires, by selling consulting or expert witness billable hours to large corporations, and they keep two different CVs, an academic one that they publish, and a much longer consulting/expert witness one that they don’t publish (because it lists in essence all their conflicts of interests) but supply only to potential corporate customers.

    These big names as the author of the book says make a lot of money on the side, and are very careful to ensure that neither themselves not their junior colleagues or research associates or phd students write a word that might alienate potential customers.

  16. Cheer up - it's Christmas!
    So, the UK has a thriving low-value economy. Is that such a bad thing? It might be a pre-cursor to a thriving higher-value economy. Do you think you can pluck a high-value economy out of thin air? Or by printing more banknotes?
    Macro-Economics: looking at the world through the wrong end of a telescope.

    Q: When is economic growth not economic growth?
    A: When it results in the biggest crash of all time.


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