You can’t read a news article now, without the word recession cropping up. The government and the Bank of England both suspect that we are already in recession (it’s not possible to know until after the event). It’s generally agreed that a recession is “A Bad Thing” (in the spirit of “1066 and All That”) – and Bad Things make good headlines.
A recession is simply two successive quarters in which the economy shrinks. It’s a pretty blunt measure and it can be confusing. What would you prefer?:
- An economy which shrinks by 10% in one quarter, then grows by 0.1% in the following quarter.
- An economy which shrinks by 0.1% for two quarters in a row.
In the first economy, there is no recession; in the second, there is. Faced with these two choices, I’m voting for the recession!
It’s also easy to imagine that the Office for National Statistics (which is the official body for economic statistics in the UK) is able to measure economic growth precisely. The ONS does not and cannot measure every transaction that takes place in the UK, so it can only estimate economic growth. It usually revises its estimates a couple of times before settling on a final estimate. It states that all of its estimates are subject to statistical error, and that “there is no simple way of measuring the accuracy of GDP”. We can never be sure what is happening to economic growth so we can never actually know if we are in a recession.
Some activities are hard to measure in economic terms (e.g. education). It’s also true that illegal activity is still economic activity – the black-market economy still contributes to economic growth or contraction!
Further evidence of the lack of accuracy is provided by considering how other countries measure GDP. Every country uses a different method. This explains a lot of the differences in economic growth between one country and the next. It explains, to a great extent, why the British economy has appeared in recent years to be the best in Europe for a few months and then rapidly became the worst, seemingly without any major changes.
There is also a growing belief that constant economic growth is not desirable. The costs of economic growth are often ignored; in recent years, the environmental cost of economic growth has become apparent, and academics have also pointed out social costs, such as a loss of personal independence and a reduction in well-being as being significant (but difficult to measure) costs of growth. So, a recession (lack of economic growth) may be beneficial in other ways – we probably all have examples of things we liked about lockdown.
Interestingly, there is no clear link between recessions and asset values, such as share prices. Stock markets have often risen during recessions. This seems counterintuitive until you recognise that markets try to predict the future. The fall in asset prices does seem to have come before the current recession. Like most forecasters of the future, stock markets are pretty unreliable – it could be said that they have predicted five of the last three recessions.
So, there is good reason not to worry about recessions. We’ll never actually know if we are one, they aren’t bad in all ways and there isn’t a clear link between them and the price of shares and other assets.
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
