UK enters recession

The fact is that real GDP almost always falls in the first quarter of the year. It’s done so in all but one of the last 62 years (when the ONS’s current records began). And the falls are big. On average since 1956, real GDP has fallen by 3.7 per cent in the first quarter. That’s more than half of the peak-to-trough fall in GDP in the 2008-09 recession, which was the most traumatic economic event since the 1930s. There’s not much sign of these early-year recessions abating; last year, GDP fell by 3.9 per cent in the first quarter.

You don’t hear about this because the media usually reports figures that have been adjusted to remove seasonal fluctuations such as first-quarter slumps. But our lived experience is not seasonally adjusted: shops really are emptier and pubs quieter at this time of year. After seasonal adjustment, it’s as hot in January as it is in July. You’ll not find anybody sunbathing in England today, though.

All this poses a question. Why are we so relaxed about deep seasonal recessions and yet so panicky about other recessions? Back in 1987 Robert Lucas – who subsequently won a Nobel prize – claimed that recessions had only trivial costs. While many economists don’t now believe that, his point does seem true of seasonal recessions. So what’s the difference between these and the others?

One difference is that seasonal downturns fall only lightly upon workers. Employment usually drops only slightly in the first quarter – and sometimes not at all – and wages are quite stable except for a drop-off in overtime payments. Millions of people are therefore sheltered from seasonal downturns.

A second difference is that companies anticipate seasonal fluctuations and so can plan around them. Retailers’ business models are based upon them making big profits late in the year and losses early on, and companies can build up cash piles late in the year to see them through the quieter times of January and February. And they can use those times to improve efficiency – to think about new product lines, upgrade software, train workers and so on.

Non-seasonal recessions, however, are utterly different in both ways. They are unpredictable – economists have consistently failed to see them coming. They are shocks that disrupt plans and create existential uncertainty by posing the question: will our business even survive this downturn? That’s quite unlike the seasonal recessions which we expect.

And because non-seasonal recessions disrupt their plans, business cannot shelter workers from their pain as they do with seasonal recessions. So we get job losses and pay cuts – which fall upon people who often don’t have the savings or borrowing capacity to see them comfortably through the hard times.

All this implies that what’s bad about recessions is not so much the drop in output (at least if it is temporary as most recessions before 2008-09 were) as the disruption of expectations.

I suspect that such disruptions are inevitable simply because the future is largely unknowable. This poses the question of whether policy-makers can do anything to reduce the damage they cause. I suspect they certainly can – for example, by developing better institutions (public and private) for polling risks. But they won’t.