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Is the recession over?

Created:

10 June 2009

Written by:

Chris Dillow

Has the recession ended sooner than anyone expected? That's the remarkable possibility raised by today's manufacturing output figures. These show that output actually rose in April, by 0.2 per cent.

In itself, this is only little reason to cheer. Manufacturing accounts for less than one-seventh of our economy. But it's not the only evidence for growth. Research group Markit recently said that its survey of purchasing managers showed that the service sector grew (pdf) in May. And official figures show that retail sales in April were 1 per cent above Q1's level.

If we put all this together, it's possible that real GDP actually grew in the second quarter - in other words that we have been out of recession for several weeks.

My table shows what I mean. It shows the contributions to GDP growth by sector (derived from table B1 of this pdf), based on - naturally - a few assumptions for Q2.

GDP by sector

Weight is parts per thousand

We can ignore the agricultural sector because it is too small. If we assume that industrial production holds at April's level for the rest of the quarter, then it will be 0.1 per cent down in the quarter as a whole, giving us a -0.02 contribution to GDP growth in the quarter - that is, -0.1 x 0.18.

If we assume construction fell at half its Q1 rate of 2.4 per cent - which is consistent with the improvement in the construction purchasing managers' index (pdf) - this gives us another negative contribution, of -0.07: -1.2 x 0.059.

Government, though, is growing. If it grows at the same 0.7 per cent rate it did in Q1, then this would add 0.16 percentage points (0.7 x 0.229) to GDP growth.

Add these three together and we get GDP growth of 0.07 per cent in Q2 even if the service sector doesn't grow.

In other words, even if we assume that April's retail sales figures and the services PMI overstate what's happening in the services sector, it's possible that the economy expanded in Q2. This would mean that the recovery has come a full 12 months earlier than the CBI forecast just six weeks ago, and six months earlier than the Bank of England forecast in last month's Inflation Report.

Now, this is only a possibility. There are tons of things that could be wrong with my assumptions; maybe the PMIs overstate activity by more than I've assumed, or maybe industrial output and retail sales will fall back in May and June; and even if GDP grows in Q2 it mightn't continue to do so.

We should, though, prepare ourselves for the chance that the recession has already ended. This would mean that the UK has emerged from the downturn sooner than the US or euro zone. Which I find truly astonishing. And I'm not alone in this.