Faisal Islam: Should we care that the UK is in recession?

Faisal Islam: Should we care that the UK is in recession?

Britain is now officially in recession.

Gross Domestic Product, or GDP, fell by 0.3% in the last three months of 2023, which is a sharper fall than economists were expecting.

This gave us two consecutive falls in GDP after a decrease of 0.1% in the three months before, between July and September 2023.

A fall in the economy, in two consecutive three month periods, has been the most widely used rule of thumb for entering a recession, across the world for decades.

More on that in a moment.

The best way to define the overall experience of the past six months, indeed the past two years, is “zero growth” or “stagnation”.

This is a matter of note, of concern, and looks set to improve only marginally over the course of this year. It was the prime minister himself who decided to set a vague target around growing the economy by the end of last year.

Around the world, there are different definitions of recession.

In the US, a committee of eight respected private economists sits and decides if there has been “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. This determination often occurs over a year after the event, and is based on monthly rather than quarterly data, and not just the size of the economy. It is more thorough, more grounded in economic theory, but less timely.

Under the US definition in 2022, two consecutive quarters of contraction was not deemed to be a recession, because of the strength of the jobs market. Under this US approach, the UK would not necessarily be in recession.

But back to why a recession is now usually defined as two consecutive quarters of economic decline.

A delve into the BBC News archives can help here.

My predecessor as economics editor, Peter Jay, told the Today programme in late 2008 – just ahead of the Great Recession – that the definition was “barmy”, and that it was made up on the “back of an envelope” in 1967 by the respected economist Art Okun, to help his boss US President Lyndon B Johnson out of a political hole.

Mr Johnson wanted to avoid recessionary headlines following one quarter’s contraction, and so Okun suggested defining it as two quarters instead. Other sources suggest Okun floated this idea in a speech in the early 1960s. Baron Jay was “in the room” when this rather consequential piece of strategising occurred 65 years ago.

This definition has stuck around the world, except in North America.

For the most part, two consecutive quarters of GDP decline have coincided with what all economists agree have been recessions. There are exceptions though, as in the US in 2022.

Indeed, it is of some relevance that the government itself has used the “two quarters” definition.

The ‘R-Word’

In his Budget speech last year, Chancellor Jeremy Hunt told MPs: “Today, the Office for Budget Responsibility forecasts that, because of changing international factors and the measures I take, the UK will not now enter a technical recession this year.”

This refrain was consistently used by government ministers last year.

At BBC News, as with almost all other media, we have consistently used this definition too, over decades, both in our coverage of how the UK has avoided recession, and how other countries have hit that threshold.

It is, however, important to distinguish between the period of broadly zero growth we have just been experiencing and the start of substantial tangible recessions such as during the pandemic and the Great Financial Crisis of 2007-2008.

Few forecasters believe that it will last into this year. Indeed if, as expected, the economy is currently growing between January and March, it may be over even as it is officially defined.

But it clearly is of some interest, especially given the prime minister’s promise to “grow the economy”.

In fact, in the absence of any statistical revisions, the “R-word”could hang over the economy until mid-May.

So now we know there have been two consecutive negative quarters, we will, as consistency dictates, be using the “R-word”, but we will also add appropriate context.

For many economists even what might be called a “micro” or “nano-recession”, would be a somewhat benign outcome given the aftermath of the worst health crisis in a century, the worst energy shock in half a century, and 15 years of near-zero interest rates scrapped in 15 months.

But it will, rightly, illuminate a more substantive issue: this economy is not growing.