Figures this released by the ONS on this week show that the UK has officially entered a recession; the second recession the UK has suffered in three years. David Cameron has said that these figures were very disappointing while Ed Miliband has called them catastrophic. But how catastrophic is a double dip recession for the UK? There are a number of reasons to doubt the media’s, and some politicians, doomsday predictions.
First, a technical recession has a very strict definition, namely two successive quarters of negative economic decline. Such a rigid definition gives rise to anomalies. It could be argued that the UK is currently in one of those anomalies. In 2011Q4 the UK’s output fell by 0.3%, in 2012Q1 it fell by 0.2% (preliminarily). Compare this to the last UK recession, which began in 2008Q2 and finished in 2009Q2, where the average quarterly fall in GDP was 1.5%. Granted no one can be sure where this current downturn will end but to compare both periods like for like by defining them both as a ‘recession’ is nonsensical.
Second, it is important to look at the economic performance of the UK prior to the current recession. In the four quarters prior to the recession (2010Q4 – 2011Q3) GDP grew 0.2%. Moreover, GDP growth between 2010Q3 and 2011Q4 has alternated between positive and negative rates every quarter. This low average level of GDP growth and large fluctuations in GDP growth during the year prior to this recession is more worrying for the UK economy than the last two quarters of very small GDP contractions.
Third, GDP growth in services actually rose during 2012Q1, after falling in 2011Q4. Services accounts for a vast majority of the UK’s total output and growth in this sector will be vital for a prosperous UK economy in the decades to come.
Although the UK economy is going through difficult economic times, critiquing the rhetoric that many politicians and media outlets spew can result in much different conclusions. Perhaps policy makers should be less concerned with avoiding a double-dip recession and more concerned with creating a long-term stable environment for UK businesses and the public.