The long term view of economic growth
On the day when the commentators draw extreme conclusions from one quarter of highly provisional GDP data, we look back over 100 quarters to get a sense of the bigger picture.
This long term performance of the UK economy is the background against which the analyses presented in these briefings are set. In this piece, we create three complementary versions of the picture, graphical, tabular and verbal. The first and third are probably better at giving an overall impression while the second, which is more detailed, works better as a point of reference for later discussions.
A graphical picture
GDP measures the overall size of the economy, both in terms of income, expenditure and output. Data is published quarterly. The statistic we use is the quarterly rate of growth of ‘real’ GDP – that is, GDP after taking out the effect of price rises.
Using this data, we divide the 25 years into a series of contrasting episodes based on the rate of growth. This is possible because while the rate of growth fluctuates from quarter to quarter, it does not jump around wildly. The recent recession, in which there were six consecutive quarters of negative ‘growth’, is a good illustration of this. Recessions, though are rare so a two way classification (recession/growth) is too crude. Instead, we classify each quarter as follows:
● Recession: growth in the quarter is negative and growth in either the preceding or following quarter is also negative. This is the conventional definition of recession (that is, two or more consecutive quarters of negative growth).
● Boom: growth in the quarter is 1 per cent or more and growth in either the preceding or following quarter is 1 per cent or more too. Although the choice of a 1% threshold is arbitrary, this rule mirrors the conventional definition of recession.
● Weak growth: the economy is not in recession but growth in the quarter is 0.625 per cent or less. This threshold, equivalent to 2.5 per cent a year, is roughly the long term UK average.
● Strong growth: the economy is not in boom but growth in the quarter exceeds 0.625 per cent.
The graph shows what happens when these classificatory rules are applied the 99 quarters from the start of 1986 to 2010Q3. Among the points to stand out are the two recessionary episodes (five quarters from 1990Q3 to 1991Q3 and six quarters from 2008Q2 to 2009Q3) and the five boom episodes, none of which lasts more than three quarters. With the exception of the very first quarter of 2000, these booms are confined to the 1980s and 1990s.
It is also clear that booms never give way to a recession. Instead, they are usually sandwiched between periods of strong growth while recessions are both foreshadowed and followed by periods of weak growth. But not every period of weak growth leads to recession while not every period of strong growth leads to boom.
Graph 1 - Real GDP growth 1986 to 2010: rule-based quarter by quarter classification
Source data: GDP chained volume measure (ONS Economic Accounts table 1, identifier ABMI, updated 22/12/2010).
A tabular picture
Although the graphical picture is far from random, the single quarters of either weak or strong growth cloud things. If they are overlooked, a series of 11 episodes emerges, a new episode usually beginning when two consecutive quarters of a different type of growth occur. While recessions remain distinct, booms have (by choice) been rolled in with their surrounding periods of strong growth. As well as the start and end points, the table shows the duration of each episode, the annual average rate of growth of GDP and the annual average rate of growth of employment.
Table 1 - Real GDP growth 1986 to 2010: 11 episodes
Source data: GDP as above. Employment: all UK employees (Labour Market Statistics, table 3, identifier MRGN, updated 13/01/2011)
Several points stand out here including: the strength of the late 1980s boom; the duration of the period of weak growth after the 1990 recession; the duration of the period of strong growth, interspersed with booms, from 1993 to 2001; the steadiness of growth from 2001 to 2007, with the strongest period of weak growth followed by the weakest period of strong growth; and though still subject to revision, the strength of growth in the second and third quarters of 2010.
A verbal picture
When we need to refer back later to the growth and employment record, this table is likely to be the place to go. In the interests of producing a yet simpler picture, we can go a little further. First, since both recessions are surrounded by periods of weak growth, each recession and its two accompanying periods of weak growth can be thought of as a single major episode. Second, the small differences between the periods of weak and strong growth between 2001 and 2007 mean these too can be thought of as one. This yields just five major episodes up to the start of 2010 – plus a still very uncertain and therefore yet-to-be-classified recent past.
1. 1986 to 1989: a 3½ year economic boom in which GDP grew at more than 4 per cent a year while employment grew at more than 1½ per cent a year.
2. 1989 to 1993: a four year period of weakness and recession, including a five quarter recession (GDP shrinking at 2 per cent a year) followed by nearly two more years of very weak growth. Employment, which fell sharply during the recession (nearly 3 per cent a year) continued to fall during the subsequent period of weak growth (more than 1½ per cent a year).
3. 1993 to 2001: almost eight years of strong economic growth, interspersed with occasional booms. GDP grew at nearly 3½ per cent a year while employment grew at nearly 1½ per cent.
4. 2001 to 2007: six years of more or less average growth, with slightly more weakness earlier and slightly more strength later. Over this period, employment grew at about ⅔ per cent a year.
5. 2007 to the start of 2010: three years of weakness and deep recession, during which GDP fell at almost 4½ per cent a year. By contrast, the period of weakness that followed the recession was shorter than before. As before, employment, which fell more slowly during the recession at 1½ per cent a year, continued to fall during the subsequent period of weak growth.
This leaves the last six months (that is, the second and third quarters of 2010), a short period of strong growth in both GDP and employment, representing a much more rapid and earlier recovery than after the last recession. Only time will tell whether the pace of recovery is sustained or falls back to the much slower rate of growth seen after the recession in the early 1990s.
A first official estimate for the fourth quarter (showing the economy shrinking by a ½ per cent) suggests weakness. But these first estimates are very provisional. Even a tentative judgment should await the sounder figures available in a few weeks. The statisticians could still make significant revisions to any of the 2010 statistics. At the moment, the only reliable designation of a period that ended but a few weeks ago is ‘uncertain’.