Scottish Economy, UK Economy

Recession and Recovery

On 13 May, Laura Kuenssberg asked Rishi Sunak, “Are we looking at a recession?” The Chancellor was polite enough not to open a window, point at then-empty streets and pull a Kevin the Teenager face. Instead he reminded viewers that, “technically,” a recession has happened when gross domestic product (GDP) falls in consecutive quarters and that it is, “very likely that the UK will face a significant recession this year.”

In the least newsy of news it became ‘official’ at 07:00 on 12 August that the UK economy had been in recession. That confirmation came with the GDP figures for the three months from April to June. During that time income fell by 20.4%, following a fall of 2.2% between January and March.

With 9.5 million people furloughed, more than a million firms receiving almost £15 billion in government-backed loans, over £10 billion in business grants issued and the number of hours worked down nearly 20% since the end of 2019 there was really little need to wait for the GDP numbers. And there is no need to wait until September to learn the same for Scotland.

However, a version of Laura Kuenssberg’s question will be more important on the way out of the economic part of this crisis than on the way in: how will we know that the recession is over and the desired recovery has happened? Despite the Chancellor’s answer, there is no ordained definition of what constitutes a recession. In many countries, including Scotland, it is simply a convention that recession occurs when there are consecutive quarters of falling GDP. The corollary is that a recession is over when GDP rises, even a smidgen. With the re-opening that has happened over the summer there has been a rebound in activity. The ‘technical’ recession is already history.

In the United States, the National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) – which is not Tinder for economists – decides if recessions have started or finished. These decisions are judgements and in making them it takes into account changes in GDP but also developments in employment, retail sales, industrial production and other indicators. In contrast to the UK, therefore, it is possible for the US to have a ‘recession’ without satisfying the consecutive-quarters-of-falling-GDP convention. That happened in 2001: GDP fell in the first and third quarters, rose in the second and fourth and increased during the year by 1.0 per cent. However, the BCDC judged that a recession had occurred from March to November as employment fell, unemployment rose and industrial production contracted in the wake of the dotcom bubble bursting.

One lesson that the BCDC teaches is that there is merit in considering a wider range of indicators than GDP alone in assessing the health of the economy as we emerge from this crisis. Has the economy recovered if income rises yet is still below its previous peak? That’s what the Bank of England reckons will happen over the next year or so. Is the recession over if unemployment remains high? What if the job market heals for most but not for the young? These questions matter not because universally-accepted definitions of recessions and recoveries are needed; all such definitions are, more or less, made up. Rather, what is accepted as the recession being over and the recovery secured matters because it will affect priorities and resource allocation. It will be important to avoid a premature declaration of ‘mission accomplished’ based on a single number.

Two issues flow from this apparently trivial matter of definitions. First, at least in the terms conventionally used to describe economic cycles, what should recovery comprise? Rising income is a necessary but not sufficient requirement. Ideally, average incomes would have returned to their pre-recession level and the distribution of disposable income would be no less equal than at the beginning of 2020. Following the BCDC’s example, the state of the job market should carry a heavy weight. ‘Full employment’ should be the target, even if that number is hard to pin down. Typically, the young suffer most in recessions. Likewise, a feature of all recessions is rising long-term unemployment and the risk that large numbers of people are shut out of the job market for so long that their skills and confidence erode and their attractiveness to employers diminishes. Minimising the rises in both youth and long-term unemployment and returning both to acceptable levels as quickly as possible ought to be high priorities. It is this basket of factors, and perhaps more, that should guide judgements about whether the recession is over and the efforts to combat it can be wound down.

Second, much has been written and said about how to ‘build back better’: a Google search for “build back better” “Scotland” returns 36,000 results. Quite honourably, a great deal of that is aspirational, a reflection of the zeitgeist. Yet, many proposals have a Blue Peter-style ‘here’s one we made earlier’ feel and if we are to proceed beyond Kumbaya and We are the World two things must happen. First, there is a need for clarity and that is beginning to emerge. For example, the STUC has a concrete proposal for how to treat key workers better, NESTA has begun to draw together a number of threads of ‘better’ and Reform Scotland has set out how to create a Scottish sovereign wealth fund. There have been other, similar efforts and semi-official contributions, too. With Scotland, hopefully, beyond the shock of the initial phase of the disease minds should turn to developing plans that include clear outcomes, delivery mechanisms and costs. That would then allow the second task to proceed: prioritisation. To misquote Aneurin Bevan, the language of priorities will have to be the religion of this recovery. That will apply to the decisions of governments, local and national, and to the choices that firms and their stakeholders, and third sector organisations will make, too.

The GDP data provide an official stamp that there has been a recession. Hopefully, in three months time they will certify that the recession ended between July and September. But it will be a long journey from there to full recovery, whether measured by a basket of indicators or further-reaching changes.


Stephen Boyle
Stephen Boyle

Stephen Boyle is a visiting researcher at the Fraser of Allander Institute. He was previously the Head of Group Economics at the Royal Bank of Scotland.