In the UK the definition of recession used by most people is two successive quarters of falling GDP. This definition always involved a knife edge problem. If GDP fell by 0.1% in two successive quarters we were officially in recession, but if output fell by 1% in one quarter and grew by 0.1% in the next there was no official recession. If a recession is meant to indicate periods in which output growth is particularly poor, then in this example it fails. The knife edge problems also means that mild recessions can easily disappear after data revisions.
A second problem has only become significant since immigration flows have been large and variable. The UK’s definition of a recession refers to GDP rather than GDP per capita (total output per head of population). GDP per head is much the more relevant number for most people, because it is a better indication of average personal prosperity. So the definition of recession should really relate to GDP per head. As the chart below shows, on that basis we have had two recessions since the end of the pandemic recovery.
A much more relevant way of putting it is that GDP per capita has still not recovered its pre-pandemic position.
The third and most important reason why our current definition of recession is not fit for purpose is that it only makes sense when underlying growth is significantly positive. Since WWII but before the financial crisis, when UK GDP per capita grew on average by over 2%, a recession indicated a lack of demand in the economy. The way to get out of recession (inflation permitting) was to boost demand by cutting interest rates or with a fiscal stimulus (tax cuts or increases in government spending). The pandemic was different of course, but it was so different there was little risk of confusion.
In contrast, the recessions since 2022 have had nothing to do with deficient demand in the economy. We know that because the Bank of England started raising interest rates over that period to stop a rise in domestically generated inflation. The labour market remained tight over this period, with unemployment at historic lows by recent standards. The economy wasn’t growing because of a lack of demand, but because the supply of goods was not increasing.
The reason for this can be seen in the following chart.
Labour productivity (here measured by output per hour) has remained close to the level achieved just before the pandemic, so GDP per head has failed to rise above pre-pandemic levels. [1] For more detail on this and some of the measurement issues involved, see Chris Giles here.
This ‘supply side’ stagnation is very different from the recessions of the early 80s, early 90s or late 2010s. Because of the latter, most people think of a recession as a short-lived demand side problem, whereas what we are seeing today is supply stagnation that has lasted nearly five years. The problems and their solutions are very different. Either we need to start referring to what used to be the normal type of recession as ‘demand deficient recessions’, or we need an alternative definition of a recession. [2]
Why has UK productivity growth been so poor since the pandemic? As we don’t have a good handle on the causes of productivity growth at the best of times, any answer is speculative. However, looking at other countries may be helpful. The UK is not alone in seeing stagnant productivity over this period. The situation in Japan, France and Germany is just as bad or worse. The major economy that seems to have done best by far over this period is the US.
US policy during the pandemic stands out from major European countries in two ways. First, the US did not have a furlough scheme financed by the government. As a result, unemployment rose much more during the pandemic, but that might have allowed efficiency gains that otherwise would have been more difficult. Second, the US gave a substantial boost to the economic recovery from the pandemic through a large fiscal stimulus.
In all countries investment fell substantially in 2020 as the pandemic hit. This lost investment would have depleted the capital stock, and also reduced the scope for innovations to be embodied in new equipment. It would be surprising if this large drop in investment didn’t have negative consequences for future productivity growth. It is also true that investment in the US during the pandemic stood up better than elsewhere, but the correlation between investment growth over the pandemic period and subsequent productivity growth is not perfect: investment in Sweden and France remained strong but their productivity growth has been weaker than in the US. It could also be the case that poor performance in some European countries is due to domestic issues rather than any common cause.
We know with some degree of certainty that this is true for the UK. Brexit reduces output permanently (eventually by a total of 4% according to the OBR) by reducing labour productivity. So part of the current stagnation in UK output and productivity is highly likely to be a consequence of Brexit. The chart below, of UK business investment compared to other major economies, comes from the FT here.
Not really. Most of the print media effectively ignored them, and pushed Brexit with as much propaganda as they could. The broadcast media ‘balanced’ the expert advice with counter claims from the tiny number of economists that wanted to push Brexit, giving the impression to all but the most savvy voters that expert opinion was divided. I have little doubt that with a media more committed to telling the truth Brexit would never have happened.
As I have said before, politicians find it hard to increase growth but can quite easily reduce it, and Brexit is a clear example of that. That is particularly true if the media actively promotes politicians likely to damage growth. That happened with Brexit, but the media environment has not significantly changed since then. If anything, right wing newspapers have become even more extreme, and the BBC still promotes ‘balance’ over knowledge.
Opinion polls today show the consequences of that. Reform, the party led and entirely controlled by Nigel Farage, is often ahead of the Conservatives and sometimes ahead of Labour. Farage made his name leading another party whose chief purpose was to advocate for Brexit. With Johnson out of the picture, Farage is effectively Mr. Brexit in the UK right now. So why is a politician who advocated for such a disastrous policy doing so well?
One response is to say voters are stupid, but that is not my view. The print media that gave us Brexit still fill their pages with propaganda designed to promote Farage and like-minded politicians, and will of course never admit how they lied to achieve Brexit. In the broadcast media, every interview with Farage should start and end by asking him why he made such a huge mistake in championing Brexit, and how can voters trust someone with such poor judgement. [3] After all, if any other politician had cost the average voter 4% of their income this would be the media’s approach. But it hardly ever happens with Farage.
Explaining the continuing popularity of Farage as ‘just about immigration’ hardly absolves the UK media. They as much as politicians are ultimately responsible for concealing basic truths about immigration from voters. The right wing press remorselessly pushes anti-immigration propaganda, and the broadcast media hardly ever asks about the cost of reducing immigration, or why refugees are forced to cross the channel in small boats. It never asks why most voters want lower immigration but at the same time want more overseas workers for most occupations.
Which is why I think it is possible for Farage to top some opinion polls despite being responsible for a large part of current UK stagnation and poor UK living standards.
[1] There are two stories behind why GDP per capita has fared slightly worse than productivity. The first reflects a decline in the measured level participation in the workforce since the pandemic, an issue I and others have talked about before [ref]. The second is that the measure of the workforce is too low because people have stopped answering the labour force survey since the pandemic, so the productivity series is too high (see here, section 3, for an alternative series.)
[2] An alternative would be to measure GDP per capita relative to some trend. That makes more sense to me for demand deficient recessions anyway, because then recessions would only be over once GDP per capita had regained its trend level. We would avoid the nonsense of journalists describing 0.1% growth after a large fall in output as the economy coming ‘out of recession’.
[3] Farage’s claim that the ‘opportunity of Brexit has been mismanaged by the Conservatives’ should be torn apart. The Brexit he campaigned for has set up barriers to trading with the EU, which is the ultimate reason why output is lower.
