U.K. GDP Said to Confirm Recession Signal

The U.K. GDP revision is said to confirm the signal of recession for the economy. I know that markets love to look at the 2 consecutive quarters of negative GDP as a rule that will define the onset of recession. However, I still prefer to view this as only ‘a rule of thumb’ and as an indicative signal not a definitive one. I have included the monthly GDP estimates for the U.K. as the accompanying chart for this discussion. What's clear from that presentation is that GDP growth has been asymptotically approaching zero; even broader charts of quarterly GDP growth show pretty much the same thing with GDP growth sliding down from strong post-COVID recovery growth rates to current growth rates that are closing in on zero. There is no doubt that the U.K. economy is in a period of weakness and under performance. And it may, in fact, be in recession or headed for one; however, at this point if it's a recession that's cropping up, it looks like a rather mild one. The two quarterly growth rates involved for Q3 and Q4 are -0.5% and -1.2% and these are at compounded annual rates. The year-over-year rate for the fourth quarter swing is from +0.2% in Q3 to -0.2% in Q4. That's not really a stark difference.

U.K. GDP revisions of quarterly rates of growth The GDP revision took Q4 GDP from a decline of 1.4% to a lesser decline of 1.2% in Q4. Private consumption switched from a decline of 0.6% to a decline of 0.2%. Public consumption rose from -1.2% to +0.3%. And there is a welter of other revelations that had impact as well, but one of the more interesting ones is that domestic demand when revised switched from +1.2% to -0.6% (Q/Q annual rate). That's when the shift begins to look a little bit more like a weaker economy of serious dimension. When domestic demand looking at annualized quarterly growth rates falls by 0.6% in Q4 after falling by 2.7% at an annual rate in Q3, that pair of negative growth rates is slightly more damaging than the pair we see for GDP.

Large trade growth rate revisions Among two of the larger quarterly revisions, exports shifted from a decline of 11% at an annual rate to a decline of 3.1% at an annual rate. Imports were shifted from a decline of 3.2% at an annual rate to a decline of 1.2% at an annual rate. Those are both relatively substantial changes in growth rates. By no stretch of the imagination is the U.K. doing well.

Some of the best news on the horizon is that the inflation picture has been getting better; it hasn't gotten better fast enough to get the Bank of England to start cutting rates yet.

Looking at Table 2 and looking at the general profile of U.K. growth rates and a much broader framework including 13 European Monetary Union countries as well as the United States, Japan, and Switzerland, we see there has been a lot of irregular growth activity recently. Nine of thirteen monetary union countries show weaker growth in the third quarter than in the second quarter; however, only four of them showed weaker growth in the fourth quarter than in the third quarter. U.K. growth weakened in the third quarter and then weakened again in the fourth quarter, logging both as negative growth rates. In the monetary union, only Ireland has negative growth rates in both periods, but Germany has zero growth in Q3 and a negative growth rate in Q4. The monetary union as a whole posts 2 consecutive quarters of negative growth; both declined some 0.2% quarter-to-quarter. Declines, yes. Severe? No.

The U.S. as a major exception It has been a weak place for growth for just about everybody except the United States, an economy that continues to surprise. But the U.S. has the benefit of having had a great deal of fiscal and monetary stimulus and also the benefit of being significantly distanced from the war that's going on between Russia and Ukraine.

Real conditions If we set aside silly rules of thumb about how many quarters in a row GDP has been negative, we see similar weakness in growth among the countries in this table with the exception of the U.S. Within the monetary union, the four largest EMU economies continue to do better than the rest of the monetary union. For the rest of the monetary union, there are three quarters in a row of negative growth; in fact for the rest of the EMU (a figure that represents the whole of the monetary union excluding the largest four economies), there are negative year-over-year growth rates in both the fourth quarter and in the third quarter with the second quarter of 2023 gaining just 0.3%. The U.K. does better than that. The four largest EMU economies post growth rates for all three of those quarters: 0.5% in the fourth quarter, 0.4% in the third quarter and 0.8% in the second quarter of 2023. These numbers, of course, pale against the U.S. at 3.1% in the fourth quarter, 2.9% in the third quarter and 2.4% in the second quarter.

Using year-on-year growth as the metric... Judging economies from year-over-year growth rates, Austria has three straight quarters of negative year-over-year growth rates. Finland has 5 consecutive quarters of negative year-over-year growth rates. France has managed to maintain positive growth rates on GDP measured year-over-year, while Germany has two consecutive quarters of year-over-year negative growth rates; it also has three year-over-year declines in GDP growth in the last four quarters. Ireland has three negative year-over-year growth rates in a row. Luxembourg has five negative yar-on-year growth rates in a row. The Netherlands has three negative growth rates in a row. These compare, of course, to the U.K. that has only one negative year-over-year growth rate in the fourth quarter of 2023. And the U.K. is in recession and the others are not?? Strange?

It's often said that statistics lie and that liars use statistics. And, of course, no short expression has ever been truer than this. However, in defense of those who use statistics (like me), I would like to point out that those of us who try to use statistics and data to create an accurate picture, face a very difficult task. That task is made worse by people who have a point of view and are convinced that they can take that round hole through which they create this point of view and cram just about any square peg of data through it. So, we are constantly faced with the uphill battle of not just trying to make sense of data that don't always point in only one direction, but data that are being used purposely to obfuscate the true picture.

It has been my method to try to present you with tables of data and charts that show trends in an attempt to demonstrate at the points that I create are true points and that the data truly are moving in the directions that I say they are. I try not to simply write and cite data that I do not show under the assumption that you will simply trust me. Trust is important; but I also think it's earned, and it's earned by creating a record that shows that you are objective about the points you're trying to make as well as the fact that you have some knowledge and insight into the things you're addressing.

Current times are tough Currently we're in a period where growth is challenged. All countries have been through Covid recession; some countries have been through subsequent episodes that look more like recessions. A lot of countries have been through episodes of very uneven growth, inflation has generally kicked up its heels, and we're a period where central banks have not been as vigilant in fighting inflation as their histories might have suggested they would have been or should have been. Part of this is because we are operating in this framework after a global pandemic that was not very well understood and that was more feared than it should have been, based on the risk of this pandemic to people who are healthy. The main risk in this pandemic was to people who were not healthy as U.S. data point out that those who died of COVID on average had 4 ½ comorbidities. Early data from New York City had showed that as early as mid-2020 among the people with known medical histories only 2% of the people who died we're healthy; the other 98% had pre-existing debilitating medical conditions. But for various reasons health officials did not promote or place much emphasis on these data and instead they treated the pandemic as extremely dangerous to everyone. Then, in the U.S., steps were taken to greatly adversely affect the economy in an attempt to stop the spread of a pandemic that really was unstoppable because it spread through aerosols meaning that even masking was ineffective against it.

Post-stimulus Economics We find ourselves in this post-COVID period with economies that still are struggling to put their economic houses in order. Inflation is lingering in part because central banks had used monetary policy excessively and then with fiscal policy to support the economy and then when inflation rose, they were unwilling to raise rates to the extent that they would have in the past to bring inflation to heel. We are going to look back at this as the period of the ‘attempted soft landing.’ And yet, it's unclear whether it will be looked back at as a period in which policy was more successful or less successful. From the standpoint of unemployment rates, so far things are quite successful as unemployment rates in the U.S. and Europe and in Japan remain at very low levels. However, inflation which boomed and then began to fall sharply and has kicked up its heels, become stubborn, and showed signs of rising from levels that are much lower than peak inflation but still considerably higher than targeted inflation. This is going to put central bankers seeking soft-landings in a bind.

Summing up The biggest example of this is a speech by Chris Waller last night who had been quite an advocate of the soft-landing objective and now sees more risk and rise in inflation. He suggests that there will be perhaps fewer and certainly slower rate cuts in the U.S. because of the change in inflation conditions. This doesn't mean that the U.S. will give up on the soft-landing although that's a possibility. It just means the people who, a few months ago, were cheering and popping champagne-bottle corks to celebrate the soft-landing’s success, are now going to face the challenge of putting those corks and those bubbles back into those bottles. We will see what the future holds. Will it be more Champaign or mere bubbles?