Monday, 29 April 2013

Recession - what recession?

This morning, Radio New Zealand's 7.00am News had an item about a Christchurch food bank facing budget cuts, although the operator of the place said the need for it was still high. She said as many people as ever were still coming through the doors, and blamed it in part on "the recession".

She's not alone: you'll find any number of people convinced that we are in some sort of recession.

So, to be clear: we're not. We haven't been, for some considerable time. And we're not going into one any time soon.

By way of background, the authorities on what is or is not a recession, and how would you know one, are the Business Cycle Dating Committee at the National Bureau of Economic Research in the US: it produces the authoritative judgement on when the US is in recession or out of it. The Committee says that "During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year". They don't go by the journalistic "two successive quarters of GDP contraction is a recession", and in their FAQ on the issue, they note that two small declines in GDP wouldn't meet their idea of a recession - they say "we consider the depth of the decline in economic activity", and they repeat that their definition includes the phrase "a significant decline in activity". Emphasis on significant, in other words.

And by "economic activity", they mean the broad behaviour of the economy as a whole, not just GDP. They say they do not have "a fixed definition of economic activity. It [the Committee] examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production (IP)".

By no conceivable stretch of the imagination would eight successive quarterly increases in GDP meet the NBER's definition of a recession - yet that's what we've actually experienced. The last time New Zealand's GDP declined was in the December quarter of 2010: since then it's all been positive (very strongly so in the latest, December '12, quarter). The quarters in mid 2012 weren't flash, but they still showed the economy growing, though slowly.

Nor have things deteriorated in recent months: quite the reverse. Going by their latest (March) surveys of business and consumer confidence, the ANZ's economists reckon the economy will be growing at an annual rate of 2.8% by the middle of this year, and say "That’s solid stuff amidst extremely dry conditions". And there isn't a single forecaster amongst the 11 surveyed in the NZIER's Consensus Forecasts expecting a recession in the next three years. At worst, the outlook is for slow growth (1.5-1.9%), while the middle of the road consensus view is for two years of 2.7% growth, followed by 2%.

That's not recession, folks. Let's keep the term for when it's warranted. Spain's unemployment rate has just hit 27.2% - that's a recession.

2 comments:

  1. The Business Cycle Dating Committee doesn't sound as exciting as I imagined it would. Imagine business leader speed dating while talking about economics.

    ReplyDelete
  2. Nice! But now you've gone and left me with a disturbing mental image that's proving hard to shake...

    ReplyDelete