Tuesday 6 January 2009

Is the UK in Recession or Depression?

There is an old joke that states:

A recession is when your neighbour loses his job.

A depression is when you lose your job.

The difference between the two terms is not very well understood for the simple reason as there doesn’t appear to a definition that has been universally agreed upon.

Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

Now, the common, accepted definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

The widely accepted definition of a depression is now any economic downturn where real GDP declines by more than 10 percent.

So, is the UK heading for a depression?
The last 6 months of 2008 is expected to see a decline in GDP of just over 1%, and whilst predictions for 2009 vary widely, the worst predictions seem to be a decline around the 3% mark, meaning that there would have to be a major adverse change in the UK’s fortunes for us to come anywhere close to a depression in 2009.

Even the pessimistic view that the recession will continue into 2010, at say another 3% reduction in GDP, would leave the UK avoiding a depression (although, were this to happen, there would clearly be a great cloud of depression across many households).

My own view remains that we will not enter a depression, but will remain in recession for the whole of 2009, with the green shoots of recovery visible towards the end of 2009, and the UK leaving recession around the middle of 2010 (just around the time of the next General Election) – something that I suspect Gordon Brown is gambling on....

However, once we start any serious recovery (and after the General Election), we as taxpayers will have to start paying back the huge public sector debt that we will have accumulated – so there will be no sudden boom in growth. My suspicion is that we will have several years of minimal growth amidst significant political turmoil as the parties argue who is to blame......

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