In the UK, the definition of recession Most people use it Two consecutive quarters of falling GDP. This definition always included the knife edge problem. If GDP fell 0.1% in two consecutive quarters, it officially went into a recession, but if output fell 1% in a quarter and increased 0.1% in the next quarter, there was no official recession. This example fails if the recession is intended to indicate a particularly poor period of output growth. The knife edge problem also means that mild recessions could easily disappear after data revisions.
The second issue has become important as the flow of immigration has fluctuated significantly. The UK’s definition of a recession refers to GDP rather than per capita GDP (total production per capita). GDP per horse is a more relevant number for most people. This is because it is a better sign of average personal prosperity. Therefore, the definition of a recession should actually be related to GDP per capita. Based on that, as the chart below shows, there have been two recessions since the end of the pandemic recovery.
A much more relevant way to put it is that per capita GDP has not yet recovered its pre-pandemic position.
The third and most important reason why our current definition of recession is not aimed at is that it only makes sense when the underlying growth is significantly positive. Since World War II, but before the financial crisis, when the UK’s per capita GDP rose on average by more than 2%, the recession had shown a lack of economic demand. The way out of the recession (authorization of inflation) was to increase demand by reducing interest rates or with fiscal stimulus (tax cuts or increases in government spending). The pandemic was of course different, but there was little risk of confusion.
In contrast, the recession after 2022 had nothing to do with insufficient economic demand. This is because the Bank of England began to raise interest rates over that period and began to stop the rise in inflation generated within the country. The labor market has remained strict over this period, with historically low unemployment by recent standards. The economy has not grown due to a lack of demand, but the supply of goods has not increased.
The reason for this is shown in the following chart:
Labor productivity (measured here as per hourly power) remains close to the level achieved just before the pandemic, so GDP per capita could not exceed pre-pandemic levels. [1] For more information about some of the related measurement issues, see See Chris Giles here.
This “supply side” stagnation is very different from the recession of the early 80s, early 90s, or late 2010s. Because of the latter, most people consider the recession a short-lived demand-side problem, but what we see today is a stagnation in supply that has been on the rise for nearly five years. The problem and its solution are very different. What once was a normal type of recession should either start calling it a “non-sufficient recession,” or an alternative definition of recession is needed. [2]
Why has the UK’s productivity growth been so poor since the pandemic? Any answer is speculative because we don’t handle the causes of productivity growth at the best. However, looking at other countries may be helpful. The UK doesn’t just see productivity stagnating over this period. The situation in Japan, France and Germany can be just as bad or bad. The main economy that appears to have done much better in this period is the United States.
US policy during the pandemic stands out from European countries in two ways. First, the US did not have a government-funded Farlow scheme. As a result, unemployment rates have increased much more during the pandemic, but may have enabled an otherwise more difficult increase in efficiency. Second, the US has significantly boosted the economic recovery from the pandemic through its massive fiscal stimulus package.
In all countries, investment fell sharply in 2020 as a pandemic hit. This lost investment has exhausted capital stock and also reduced the scope of innovation being embodied with new equipment. It would be surprising if this significant drop in investment did not result in negative consequences for future productivity growth. Additionally, while investments in the US during the pandemic have been ahead of other locations, the correlation between investment growth during the pandemic and subsequent productivity growth is not perfect. Investments in Sweden and France remained strong, but productivity growth is weaker than in the US. Additionally, poor performance in some European countries may be due to domestic issues rather than a common cause.
We know with some certainty that this applies to the UK. Brexit will permanently reduce output (eventually, 4% total according to OBR) by reducing labor productivity. Therefore, it is very likely that part of the current stagnation of UK production and productivity is a result of Brexit. The following chart of UK business investment compared to other major economies comes from FT here.
However, it is little surprising that it will pass, as the decline in magnitude order production estimated by the OBR was predicted by all independent economists in this field who saw this before the referendum. Did voters ignore these warnings?
not much. Most of the print media effectively ignored them and pushed Brexit with as much propaganda as possible. Broadcast media “balanced” expert advice with counter claims from a few economists who wanted to promote Brexit, giving the impression that expert opinion was split among everyone except the most savvy voters. I have little doubt in the media that is more committed to telling the truth that Brexit never happened.
As I said before, politicians find it difficult to increase growth, but it can be reduced very easily. Brexit is a clear example. That is especially true when the media actively promotes politicians who can undermine growth. It happened with Brexit, but the media environment has not changed significantly since. If anything, right-wing newspapers are even more extreme, with the BBC still promoting “balance” over knowledge.
Today’s polls show the results. Reforms led by the party and completely controlled by Nigel Farage often go ahead of the conservatives, and sometimes ahead of the labor. Farage made his name to lead another party whose main purpose was to defend Brexit. Farage is effectively British Mr. Brexit, as Johnson was removed from the photo. So why are politicians who supported such disastrous policies doing so well?
One response is to say that voters are stupid, but that’s not my opinion. The print media that gave Brexit still fills the page with propaganda designed to promote like-minded politicians with Farage, and of course never acknowledges how to lie to achieve Brexit. In broadcast media, all interviews with Farage should begin and end by asking him why he made such a big mistake in defending Brexit, and how voters can trust someone with such poor judgment. [3] After all, if other politicians cost the average voter 4% of their income, this becomes the media approach. But that rarely happens in Farage.
Describing Farage’s continued popularity as “about immigration” is barely spared the British media. They are responsible for politicians to ultimately hide basic truths about immigration from voters. Right-wing presses meditatively pushing anti-immigrant propaganda, and broadcast media rarely asks about the cost of reducing immigration, or why refugees are forced to cross the waterways on small boats. Most voters never ask if they want to reduce immigration, but at the same time they want more foreign workers in most occupations.
So, despite being responsible for the current UK stagnation and the majority of poor people with UK standard of living, I think it’s possible for Farage to top polls of several opinions.
[1] There are two stories behind why per capita GDP has slightly worsened than productivity. The first reflects the decline in measuring levels of participation in the workforce since the pandemic. [ref]. Second, the productivity series is too high because the workforce measures are too low as people have stopped responding to workforce surveys since the pandemic. hereSection 3, for Alternative Series. )
[2] Another way is to measure GDP per capita compared to some trend. It makes more sense to me by calling for an inadequate recession anyway. This is because the economic recession is only once per capita GDP has regained that trend level. Avoid journalist nonsense explaining 0.1% growth after a massive drop in production when the economy begins to “get out of the recession.”
[3] Farage’s claim that “Brexit opportunities are mismanaged by the Conservatives” should be torn apart. Brexit, where he campaigned
We have set barriers to trading with the EUthis is the ultimate reason for the low output.
