Friday, January 23, 2009

Britain Officially in Recession

by Bill McBride on 1/23/2009 11:17:00 AM

From The Times: It's official - Britain is in recession

Britain is in the grip of its sharpest recession for three decades, grim official figures confirmed today ... The economy suffered a brutal 1.5 per cent drop in Gross Domestic Product (GDP) during the past three months, shrinking at its fastest quarterly pace since 1980.

Coming on the heels of an already steep 0.6 per cent plunge in GDP in the third quarter of last year, the news means that the widely accepted definition of recession as two consecutive quarters of falling output has finally been met.
This brings up a couple of interesting points:

  • For an "official" recession in Britain they use the "two consecutive quarters of declining GDP" rule. In the U.S., a recession is declared by NBER based on a number of factors:
    A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.
  • GDP is reported very differently in different countries. In the U.S. the headline number is the real (inflation adjusted) quarterly change, seasonally adjusted at an annual rate (SAAR). In Britain and the EU, the headline GDP number is the real quarterly change, but it is not the annual rate. So a 1.5% decline in the U.K. is about the same as a 6% decline (SAAR) in the U.S.

    China reports the year-over-year change in real GDP for the quarter, so the 6.8% GDP for Q4 recently reported includes the changes in Q1 through Q3 too. As Roubini noted:
    The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the U.S. and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.

    When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.

    Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.
    Here is the Britain report: UK output decreased by 1.5% in Q4 2008
    Gross Domestic Product (GDP) contracted by 1.5 per cent in the fourth quarter of 2008, compared with a decrease of 0.6 per cent in the third quarter. The increased rate of decline in output was due to weaker services and production industries output.

    Construction output decreased by 1.1 per cent, compared with a decrease of 0.2 per cent in the previous quarter.
    UK GDP