Recession watch

Afternoon all,

Happy recession day. To help you mark the occasion, TOTCs is 24 hours early this week. And we’ve got a recession special from myself and James Smith (who runs our macroeconomic work), unpacking today’s gloomy GDP stats with everything you need to know. It’s not pretty, but if you think this is grim, just be thankful we haven’t done a special on the state of British by-elections…

Torsten

Chief Executive
Resolution Foundation

Slowly shrinking

Let’s start with the basics – what’s dominating most of the (slightly odd) coverage today. At 7am this morning the ONS confirmed what markets were expecting: the UK entered a technical recession in the second half of 2023. A GDP fall of 0.3 per cent in the final quarter of the year meant that we crossed the bar of having two consecutive quarters of declining output. As an aside, the pandemic is so recent that this is the fastest return to recession in nearly half a century.

Now the decline in GDP (0.5 per cent over two quarters) was bigger than the OBR, Bank of England and markets were expecting, with consumers abandoning the shops in the face of higher prices and mortgage bills. But it’s small compared to the beginning of other recessions (see the chart above). They normally see steep falls in output as big, bad things happen (think banks going bust). The first two quarters of recession during the financial crisis saw GDP fall by 2 per cent. Substantial recessions also see large rises in unemployment, but today it remains low (3.8 per cent). This welcome reality is why you may have heard some journalists sounding chillaxed about the recession news.

What actually matters

But what really matters isn’t GDP, it’s GDP per capita – how much we produce per person is what underpins our living standards. This is important, because how dire our economic performance has been is being hidden by something: simply having more people. You’ll have seen headlines about very high migration rates over the past few years, and the ONS recently decided the population included 750,000 more people over 16 than previously thought.

If we look at GDP per capita, we see that the problem isn’t that the economy has gone slightly backwards over the last six months, it’s that it’s been doing so for almost the last two years, with no growth since the start of 2022. Seven quarters of falling GDP per capita is the longest period of continuous decline on record (going back to 1955), while on this measure 2023 saw us go backwards by 0.7 per cent, rather than eking out marginal growth of 0.1 per cent in GDP terms. This is nothing to be chillaxed about.

World beating

Britain is not alone in falling into recession in late 2023 – so have Japan, Germany and several other European economies. This shouldn’t be a surprise – in fact the surprise is more that Europe hasn’t seen deeper recessions given the huge size of the energy shock we’ve lived through. Looking forward, I’d rather be us than Germany. But that doesn’t mean ignoring what’s happened over the past five years since the pandemic kicked off: we’re at the bottom of the pack alongside Canada and Germany.

GDP per capita in the UK is still 1.5 per cent below the level it was at the end of 2019. The US is an outlier in the positive sense: between Q4 2019 and Q4 2023, American GDP per capita grew by 6.7 per cent. The yanks have had the best recovery.

Stagnation nation

The problem is not that the UK is entering a recession today – and certainly not that it’s nose-diving into one right now. Instead the problem is that ours is an economy stubbornly struggling to grow, with that reality partly hidden by exceptional levels of population growth. Worse, the past two years are just the latest instalment of the past decade and a half of stagnation. Over this period, GDP/capita has on average grown by just 0.5 per cent a year, a fraction of the growth rate of the previous 15 years (2.5 per cent between 1993-2008).

Without this stagnation our national income would be nearly 30 per cent (or £12,500) higher per person. This is the real problem, the reason we were so ill-prepared for the cost of living crisis, and the background to why the whole country feels squeezed. There’s nothing “technical” about this reality. Britain has become a stagnation nation.

Getting a grip

What today’s recession news should really be doing is prompting our political parties, in an election year, to sort themselves out. We’ve got to do better than today’s debate about ludicrous tax cuts we can’t afford, and pencilled in spending cuts we can’t deliver. Instead we need to raise our sights to the real question: how we end stagnation. Here’s our starter for ten.