Join our community of smart investors
OPINION

The coming recession

The coming recession
December 17, 2021
The coming recession

We are on the brink of recession. I don’t say this because Omicron will savage the economy, but simply because it is that time of year.

Since quarterly data began in 1955, real GDP has fallen on average by 3.9 per cent in the first quarter of the year and risen only slightly in the second. All the economic growth we’ve seen since the mid-1950s – a tripling of real incomes per head – has come in the second half of the year.

This pattern remains true even in our post-agricultural, post-industrial era. Since 2000 real GDP has fallen on average by 2 per cent in the first quarter and another 1.2 per cent in the second. Every first quarter of the year since 2008 has seen some fall in GDP. And we’ve seen recessions – in the sense of two successive quarterly falls in GDP – not just in 2020 and 2021 but also in 2010, 2011, 2012 and 2019.

In the first quarter of 2021 real GDP fell 4.6 per cent. Pundits blamed this on the post-Christmas lockdown. But around half was due simply to the time of year.

You might wonder what I’m on about. If big slumps in output are so common, why don’t we hear more about them?

It’s because official figures are adjusted to smooth away such seasonal fluctuations. Such adjustment, however, erases lived experience: after seasonal adjustment it is as warm in January as it is in July, but nobody dresses that way, except in Newcastle.

Although TV and newspapers don’t tell you about such recessions, your own eyes and ears do. Even when there’s not a pandemic shops and pubs are much quieter in the new year – which is why you get so many offers of cut-price lunches.

All this produces a paradox. If real recessions are so frequent, why are the statistical ones so scary?

It’s because it’s easier to protect against seasonal recessions. Shops, restaurants and pubs know they are coming and use the profits they make in the run-up to Christmas to cover losses in January and February. This is why a lack of business due to Omicron has been so terrible for some: it has deprived them of the profits they need to see them through the new year.

Against other recessions, however, there is even less protection. For one thing, these usually see falls in housing and share prices, so we suffer a loss of wealth as well as income. And for another, because they are unpredictable, self-insurance is not possible: people cannot so easily use the profits accumulated in good times to see themselves through the bad. Nor, of course, can they use ordinary insurance: those who fell through last year’s furlough safety nets discovered that the welfare state was not as generous as they thought.

Put it this way. Imagine your income were to fall 5 per cent one year, having grown 2 per cent a year for a while. Unless you have huge fixed outgoings, you could cope easily with this: £1 in £20 is not much. But a 5 per cent drop in aggregate incomes would be worse than we saw in 2009 (though not as bad as 2020). So why was that so catastrophic?

It’s because it wasn’t a 5 per cent fall for everyone, but a 50 per cent-plus drop for those who lost their jobs and businesses.

Our problem, then, is not recessions. It’s that we have inadequate methods for pooling risks.