The UK economy faces a disruptive event that threatens to cause a sharp drop in incomes.
No, I’m not talking about Brexit but Christmas. The post-Christmas lull in economic activity will very probably cause recession.
History tells us this. In the past 30 years real GDP has fallen on average by 2.9 per cent in the first quarter of the year and by a further 0.3 per cent in the second. In fact, since current quarterly data began in 1955 only one year (1973) has seen the economy expand in the first quarter.
To put this another way, real GDP is three times as great now as it was in 1968. And all this growth has come only in the second half of the year.
There’s no sign of a lessening in this pattern. This year, GDP slumped by 3.8 per cent in the first quarter and flatlined in the second.
A big driver of these swings is, of course, retail spending. In the last 30 years sales volumes have fallen by an average of 21.8 per cent in January – and that’s with the help of January sales. They’ve tended to flatline in February, grow from March to July, fall back in August and September and then surge in the run-up to Christmas. On average, sales volumes in December have been 27 per cent higher in December than in September. And again, there’s no lessening of this pattern. Last year, sales surged by a third from September to December and slumped 30 per cent in January.
If these numbers come as a surprise, it’s because of a systematic reporting bias. The numbers you hear about in the media are adjusted for seasonal fluctuations. Such adjustments, though, remove our actual experience. If we adjust for seasonal variations, we spend as much time sunbathing in December as we do in July. But that’s not how we live our lives. In the real world many of us face fewer jobs and less overtime early in the year, and fears that the post-Christmas lull in demand will persist.
Herein lies one reason why these numbers matter. Investors and politicians talk about the threat of seasonally-adjusted recessions as if these were catastrophes: just look at how stock markets have fallen so much on the mere whiff of a slowdown. In the real world, however, we see big falls in economic activity every year. Which poses the question: why are so many so frightened of business cycle recessions while being so relaxed about regular real-world ones?
In fact, the two might be related. Cornell University’s Yi Wen has estimated that the seasonal swings in output due to Christmas actually cause around half of the fluctuations in US output that we call business cycles. Is it really a coincidence that countries that have big seasonal swings in output also have more volatile booms and busts in seasonally-adjusted GDP?
One reason for this could be that consumers who cut back their spending after Christmas – perhaps because they have got into debt – retain the habit of thrift. In this way, short-term drops in demand can lead to longer-term ones.
From the point of view of economic efficiency, therefore, Christmas is a menace – and not only because a lot of the money spent on presents is wasted, as Yale University’s Joel Waldfogel has pointed out.
But then, there’s more to life than economic rationality. In a sense, then, this is a story about Brexit after all.
