Sunday, April 17, 2022
Don't expect a recession, but don't bank on much growth either
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

We have got used to very odd things happening in recent years and another would be if, so soon after the biggest recession for nearly a century – 2020 was the worst year since 1921 – another was to come hard on its heels. This would be the classic “you wait ages for a bus and two come along at once” situation.

It would also be highly unusual, certainly in recent times. You may recall that, after the global financial crisis of 2008-9, official figures suggested that the UK was experiencing a “double-dip” recession and was on the verge of a triple-dip. But the figures implying that were revised, so the economy grew from 2009 to 2020. Before that the economy recorded an unprecedented 63 consecutive quarters of growth, from the spring of 1992 to early 2008.

The worry now arises from a combination of two things. The first is that the economy slowed to a crawl in February according to monthly GDP (gross domestic product) figures, growing by just 0.1 per cent. This was before the full impact of the second factor, the cost-of-living crisis which will result in one of the biggest squeezes on real incomes on record.

This combination of factors had some economists, if not predicting outright recession, at least flirting with the R-word. Ruth Gregory of Capital Economics said the weak figure “increases the risk of a contraction in GDP in the coming months as the squeeze on household real incomes intensifies”.

Samuel Tombs of Pantheon Macroeconomics predicts a 0.4 per cent fall in GDP in the second quarter which, on the now traditional “two successive quarterly declines” definition, would take us halfway to a recession. Thomas Pugh of RSM UK, a tax, audit and consulting firm, said that it would not take much more of a rise in oil prices or disruption to supply chains to push the economy into recession.

Today then, I have good and bad news for you. Let me start with the good news. That disappointing 0.1 per cent rise in GDP in February, which apparently showed the economy teetering on the brink, was not quite what it seemed.

Not for the first time over the past two years the figures were distorted, in this case by NHS Test and Trace and the vaccination programme. There was a 47 per cent fall in NHS Test and Trace activity between January and February and a 65 per cent drop in vaccinations as the booster programme wound down.

Having been boosted by these activities in December and January, their unwind subtracted 1.1 percentage points from the economy’s monthly growth rate in February. Yes, without that factor, GDP would have risen by a robust 1.2% on the month.

Not everything in the garden was rosy. Industrial production and construction both slipped in February under the impact of higher energy prices and supply-chain difficulties. But private sector services were strong and showed little sign of an economy succumbing to the cost-of-living crisis. There was a 0.7 per cent rise in consumer-facing services, driven by big increases in travel and tourism, hotels and hospitality.

This picture of private sector services growing strongly is consistent with the purchasing managers’ index (PMI) for February and, indeed, for March, once the Russian invasion was under way. Indeed, in its commentary on the March service-sector PMI, Markit, which produces the data, said: “UK service providers signalled an exceptionally strong increase in business activity during March and the rate of expansion accelerated to its fastest for 10 months.”

The big picture for the economy, admittedly before the most intense phase of the cost-of-living crisis, is thus one in which services are doing well, offset by the impact of a further winding down of NHS Test and Trace and vaccinations, and stagnant, at best industrial production. Construction, according to its PMI, is doing OK.

I said there was good news and bad news. A typical growth forecast for this year is between 3.5 and just over 4 per cent. The latest official forecast, from the Office for Budget Responsibility (OBR) was 3.8 per cent. That sounds very good. With the exception of last year’s 7.4 per cent bounce, it would be the fastest since 1997.

The figures are, however, deceptive. If the economy turns out to have grown by about 1 per cent in the first quarter, as seems likely, then as Philip Shaw of Investec points out, it would still show annual growth in 2022 of 3.7 per cent or so, even if the economy were to flatline for the next three quarters.

Such is the magic, and indeed sometimes the maddening nature, of statistics. Because the economy was depressed by lockdown a year ago, its annual growth in the first quarter of this year is likely to have been more than 9 per cent, thus doing most of the heavy lifting for this year. If GDP were then to stay at its first quarter level for the rest of the year, its annual growth over the subsequent three quarters would be 3.3 per cent, 2.3 per cent and 1 per cent.

It could even take one or two small quarterly GDP falls, in the spring and autumn, and yet record what looks like a very robust annual growth rate. Sorry for so many numbers, but did anybody say “lies, damned lies and statistics”?

This, I think, is the way to look at what is in prospect. Just as last year’s “strongest growth in the G7” was something of a statistical mirage, largely reflecting what happened in the second quarter of the year, so the best of this year’s growth is already behind us.

That fits better with a narrative in which households and businesses are suffering a multiple-whammy hit, from rising costs and prices, particularly for essentials, and rising taxes. You would hope that the economy can do a little better than flatlining for the rest of the year but you would not want to bet on it.

It fits better too with the way the economy impacts on people and firms. Most, understandably are more concerned with growth through the year, in other words from now on, than the annual growth rate thrown up by the statistics. Growth through the year looks like being subdued, though will vary from sector to sector.

We can avoid recession and should do so. But it won’t feel very much like the sunlit uplands.