Is the UK heading for a recession?
Consumers seem to think so. And they are supposed to be driving the recovery.
The strange thing about British recessions is that no one ever really spots them in advance. Or rather, plenty of people spot them coming - not least consumers - but it takes a surprisingly long time for that to be reflected in the forecasts.
The pandemic caused downturn of 2020 is obviously a special case. Forecasters can be forgiven for not spotting it ahead of time. But it is worth looking back at what the consensus estimates said about the two previous recessions, that of 2008-09 and that of the early 1990s.
The latest vintage of ONS data reports that the recession associated with the financial crisis began in the second quarter of 2008 and lasted until the third quarter of 2009.
The Treasury, helpfully, provides a spreadsheet of the key consensus forecasts for GDP, unemployment and inflation drawn from its monthly round-up of independent forecasts going back to the mid-1980s. The data has limitations, for a start it only gives annual forecasts.
Still, one gets a decent sense of how the outlook was seen at any given time by looking back over it. In that spirit, it is instructive to examine the consensus forecast for the GDP growth in 2009 over the course of 2008 and 2009. The two things to keep in mind are that (i) the recession officially began in Q2 2008 and that (ii) the actual outturn (according to the latest ONS data) was an annual contraction of 4.2% in GDP.
The kindest thing that can be said that is that the consensus got there in the end. Although even once the economy had actually entered a downturn it wasn’t yet showing up in the forecasts.
The 1990s picture is similar. That recession lasted from the third quarter of 1990 until fourth quarter of 1991. Annual growth in 1991 was (again by the latest vintage of ONS data) -1.2%.
Here’s how forecasters saw that year developing in from 1990 onwards. Note firstly that there is no data for July 1991 and secondly that the Treasury did not start asking about forecasts for 1991 until April 1990.
As with the late 2000s recession, consensus caught up with reality rather late. But again it was very late.
Forecasting the macroeconomy is hard. There are plenty of reasons for that of course, not least because the decent hard data comes with a substantial lag. We are not approaching mid-April and the ONS released it’s first estimates on February’s GDP this morning.
I’ve been struck over the last few weeks but how little discussion there is of the prospect of a recession in the months ahead. Sure, the Chancellor was rightly keen to warn at the time of his Spring statement that the Office for Budget Responsibility’s forecasts did not yet include the full impact of the war in Ukraine. But there seems to be a strange sense of complacency, an acceptance that this year will be a tough one for the economy but an underpaying of the downside risks.
Growth in the long run is a story of productivity, employment rates, the capital stock and population changes. But growth in the short term is really a question of arithmetic and the maths is not looking especially reassuring.
The OBR’s supplementary tables on the components of growth are helpful to give a sense of where they see the real increase in spending this year coming from.
Fiscal policy is becoming tighter, net trade is a drag on growth and despite earlier hopes of a post-pandemic investment boom fixed capital formation (whether government, business or in the form of dwellings) looks set to be soggy in 2022.
The result is that 90% of the expected growth this year is coming from private consumption. This is supposed to be the second year of catch-up after the fall in private consumption in 2020.
I can’t help but be somewhat worried by that.
We know that real house household income looks set to take it’s biggest hit in decades.
The risks to those numbers are stacked to the downside. There is a better than evens chance that, as a result of developments in Ukraine, inflation will overshoot the OBR numbers.
By their reckoning, adjusting for distortions caused by compositional effects and the end of the furlough scheme, underlying wage growth is materially weaker than the official statistics report.
Higher prices and slower wage growth add up to a larger hit to real incomes. It is no surprise that consumer confidence has collapsed.
The GfK Consumer Confidence Index fell for the fourth month in a row to -31 from -26 in February, its lowest since November 2020, deep in the coronavirus pandemic.
Readings of -30 and below have presaged recession on four out of five occasions since the survey started in 1974.
The survey's gauge of personal finances for the coming year slumped to a joint record low, matched only by July 2008 when the global financial crisis was reaching a climax.
Maybe this time will be different, but historically speaking at least levels of consumer confidence have been a better leading indicator of the UK outlook than the views of economists.
Right now household finances are taking their biggest hit since at least the 1950s at a time that they are also expected to generate around 90% of increase in expenditure across the economy as a whole. That seems, ahem, less than ideal.
A Value Added Programming note: I’m back from my pre-Easter/school holidays break. Normal service will reassume this week.
As ever if you are enjoying this newsletter please do consider subscribing. You’ll get more posts and I’ll get the resources to carry on producing it.