There are many puzzles about the economy, and in the holiday spirit a quiz is provided at the end. A bottle of champagne from me to the winner, the drawn will be from correct entries on the 31st.
It might be difficult predicting the outcome of the fiscal cliff in the US. But at least we can understand what has been going on with the American economy. Output flattened and began to fall during the summer of 2008. Just over a year later, it began to recover, and is now higher than it was before the recession. The fall in employment started later and did not end until February 2010. Since then, 5 million net jobs have been created, though the level of employment is still below its previous peak.
These patterns are very reassuring to economists. This is how the world should be. Employment changes lag behind changes in GDP, exactly as they have done since time immemorial. There are good reasons for this. When a recession starts, firms might not believe at first how bad it is going to be. Getting rid of experienced staff and then having to hire new ones once the slump ends is expensive and disruptive. So people are kept on. There is also a credibility problem once the economy starts to pick up, so staff levels are not immediately rebuilt.
The puzzle in the UK is becoming well known. Employment reaches record highs. Separate confirmation of the buoyancy of the labour market is provided by the falls in unemployment. Yet the Office for National Statistics says that output has been flat.
So are we still in recession? Stephen Potter, the great British humorist of the 1950s, had a marvellous phrase which gives the appearance of expertise, in almost any context: ‘Yes, but not in the South’. This seems to me to be spot on. The regional divide appears to have widened markedly. I think the GDP figures will eventually be revised upwards, but the regional split is another candidate to explain the output and employment puzzle.
During 2013, my feeling is that it will become more and more apparent that the recession is well and truly over. So, for some seasonal nostalgia, here is a quiz about recessions. A recession is defined here as being a year in which real GDP growth is less than zero. I am a fan of economic history, which should be compulsory for all economics students. So the quiz spans the period since 1900, and covers all the developed economies.
We think we may have had it bad in the last few years, but for starters: what is the biggest cumulative fall in real GDP in peace time in any of these countries, where and when? Keeping the negative tone, what, where and when was the biggest fall in GDP in any single year? Finally, to end on an appropriately optimistic note, what, when and where was the biggest gap between recessions? Prosperous New Year to all.
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As published in City AM on Wednesday 19th December 2012