The UK has entered recession. I say this simply because history tells us it has done so.
In the past 50 years, real GDP has fallen in the first quarter of the year by an average of 3.5 per cent. In only seven of these 50 years has it risen. And on average, we don’t see much recovery in the second quarter. Real GDP has grown by an average of only 0.5 per cent in this quarter in the past 50 years. This means that all the economic growth we’ve had in the past 50 years has occurred only in the second half of the year.
If we define a recession as two successive quarters of falling GDP, we’ve had a recession in five of the past 10 years – including both last year and the year before.
If all this sounds odd to you, it’s because I’m describing the GDP figures before statisticians adjust them for normal seasonal variations.
There is, though, something artificial about this. If we adjust for seasonal variations, it is as warm today as it is in July. But nobody dresses as if it is.
It is the unadjusted numbers – in both temperature and GDP - that tell us about people’s actual experience and behaviour. These explain why retailers slash prices after Christmas – because it’s their best chance of clearing stock and raising cash. They explain why bar and restaurant staff see their hours cut in the new year and their tips fall. And they explain why many small businesses breathe a sigh of relief when the orders start coming in again in the new year.
This raises a puzzle. Markets (and the media) regard the prospect of recessions in seasonally adjusted data as a terrifying thing. And yet in the real world, recessions are common and get little attention: how many reports did you read of the 2018 or 2017 recessions? Why is this?
You might think it’s because firms can cope with seasonal recessions. They can use the cashflow earned in good times to see them through bad, or at least can resort to short-term borrowing, but they cannot so easily do so in other recessions.
One big fact, however, suggests this is not always the case. This is that business failures are not especially cyclical. The Office for National Statistics (ONS) says that 11.4 per cent of companies shut down last year. That’s not far shy of the 11.8 per cent that closed in 2009 – which was, remember, the worst recession since the 30s. Most business failures occur not because of seasonally-adjusted recessions but in normal times. I suspect that many of these are victims of seasonality – of cashflow deteriorating in the first half of the year, or rent falling due at the end of the quarter.
Instead, perhaps something else is going on – adaptation. We become accustomed to unpleasantnesses if they are regular enough. What disturbs us are deviations from the norm. An early year recession, nasty as it might be, doesn’t trouble us because we see it as normal: sure, we don’t see it in newspaper reports, but we do see it in everyday ground truth when we walk into shops, pubs and factories. Other recessions, however, aren’t so normal. Which creates uncertainty. And it is this – more than the loss of income – which troubles us.
Comfort and discomfort alike are matters not so much of objective reality as of what we are used to, and what we aren’t.
