No, the UK did not “plunge” into recession yesterday
That the economy took a massive hit due to Covid-19 should be news to no one, says John Stepek. The real question is what happens now.
Yesterday, the UK economy set a new record in awfulness.
Britain’s GDP shrunk by 20.4% between the first and second quarters of the year. That was the worst GDP drop on record – and the records go as far back as 1955.
It also followed a drop in the first quarter. That means we had a recession – two quarters of GDP falling in a row (this is a very loose definition but most people accept it).
Cue lots of “UK plunges into deepest-ever recession” headlines in the business press. It sounds terrible. It sounds really, really bad.
But you should ignore it. Particularly if you’re an investor...
What does this data tell you that you don’t already know?
How can I say that you should ignore the worst GDP slump on record for the UK? I mean, we’re in a recession, aren’t we? Isn’t that bad?
Well yes, we’d rather not be in an economic slump – but did you imagine that we weren’t?
As someone pointed out on Twitter yesterday, it’s not really surprising that "the economy dropped off a cliff when all the shops shut and people couldn’t get to work”. So all that this GDP data is telling you is something that you already knew. The economy has taken a big hit.
As to the epic, nay, record scale of the drop – again, GDP measures economic activity. If you actively seek to end all “non-essential” economic activity in the name of preventing the spread of a poorly understood but potentially lethal disease, then you have to expect economic activity to fall hard.
(Somewhat hilariously, the 20.4% drop was actually better than expected – economists had been betting on a 20.5% drop.)
Indeed, if you wanted to be really contrary about it, you might argue that the depth of the downturn reflected the success of the anti-coronavirus lockdown. It shows that people complied with it.
Why was the UK so much worse than other European countries?
OK, you might say. So we haven’t learned anything new on that front. But what about the relative decline – why was the UK’s so much worse than other European countries?
You can point to lots of things on this front and decide on whatever supports your own political preferences. (And everyone already has.)
But one key feature is timing. Britain shut down a bit later than many of the other countries, which meant that we took less of a GDP hit in the first quarter (2.2% versus about 5% for the likes of Italy and Spain), and more of one in the second quarter.
Don’t get me wrong, Britain has still taken a big knock. I’m not saying we’re top of the league tables here by any means. And our economy is particularly vulnerable due to our high dependence on consumer spending.
But as economist Julian Jessop pointed out (again on Twitter), if you combine GDP figures for the first half, then Britain’s economy still took a horrendous hit, but a “slightly less awful” one than Spain.
Why is this irrelevant for investors?
Surely this figure must be important for investors? I mean, it’s showing what an awful state the UK economy is in. Haven’t we “plunged” into recession, as all the headlines say?
Well, no. All this data shows is that we were in recession in the first half of this year. And anyone who didn’t expect that, clearly wasn’t paying attention to all that coronavirus stuff that’s been going on.
Economic activity is picking up again now. So far from “plunging” into recession yesterday, all that happened is that the UK’s official statisticians confirmed what we already know – that economic activity hit a standstill in the second quarter. We’re probably already moving out of recession right now.
This is why this data doesn’t matter much for investors. The GDP figure is historic. It’s a look at the past – and by market standards, the distant past. This is why the GDP data had barely any impact on markets, and rarely has.
By the time it arrives, we’ve already been through the period in question. Markets are forward-looking – if they haven’t already managed to have a good guess at what economic performance has been doing during the period in question, then they’re not doing their job.
(The data is also often heavily revised – and you’d expect this data to be particularly vulnerable, given the uncertainty around everything right now.)
So in short, it doesn’t matter that we learned yesterday that the UK’s GDP fell by a record amount, and that we were in recession in the first half of the year, because ultimately, we already knew all that.
But what happens now?
The more interesting question is what happens now. So far, the signs are that the economy is rebounding quite strongly. In June, GDP rose by 8.7% on the month before.
Does that mean it’s all sunshine and roses from here? Absolutely not. There are two big unknowns. The first is unemployment – unemployment represents serious economic scar tissue. It damages individuals and it damages the economy and it’ll take a long time to get back to where we were. It’s going to take a while to get a handle on how this unfolds.
The other is the risk of a full-on second wave of the virus and how we would handle that. We have no real way of knowing – I’d assume that a full lockdown would be resisted as much as possible, but I’m guessing we won’t get a better idea until we see how the recent re-opening of the economy impacts on cases.
However, the point is that we’re now in the phase where things are getting better rather than worse. The reality is that just as the headlines are all saying that we’ve “plunged” into recession, we’re already well on the way out.
And that’s why it’s old news that you can safely ignore.
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