Page last updated at 11:58 GMT, Friday, 24 October 2008 12:58 UK

The UK is on recession watch

By Hugh Pym
BBC economics editor

A recession is when your neighbour loses his job - a depression is when you lose yours.

City of London
The economic storm is set to last for a long time

That old line perhaps sums up best what these gloom-laden economic terms mean in reality.

Today's figures for economic output in the third quarter proved quite a bit worse than expected.

Yes, economists had expected the first quarter of negative growth since 1992. But the 0.5% drop was bigger than the consensus prediction.

The only areas of positive growth were in agriculture/forestry and Government spending. So not much consolation there then.

Services saw the first downturn since 1992, with a drop of 0.4%.

Within that, retailing, hotels and catering experienced a big drop in output, of 1.7%.

These are precisely the industries that are most vulnerable as consumers tighten their belts. Manufacturing had a second successive quarter of declining output, with a drop of 1%.

Recession confirmation

But still, technically, we are not in recession. It looks as if the UK is heading that way but it has not yet formally been confirmed. Sounds confusing? It is!


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It does not help that the United States has a different definition of a recession from the UK.

Over the pond, the National Bureau of Economic Research decrees when a recession has begun.

There is an assessment of a broad range of indicators before the verdict is reached by the Bureau.

In the UK, and many other economies, there is a more precise definition decided not by experts but the statistics: two successive quarters of negative growth in economic output (GDP).

The problem here is that you may not know officially you are in a recession until after the event - in other words, when the growth figures for the second of the two quarters are published.

So the economy may be in the doldrums, but the technical definition of a recession will not have been met.

That will come in January when the fourth quarter numbers for 2008 are published.

Plenty of pain

This may feel like semantics, especially for someone who has lost their job or their home. The difference between marginal growth and marginal contraction is hard to detect on High Streets or in workplaces.

In many parts of the economy, plenty of pain will be experienced before a recession is officially confirmed.

Yet despite the technicalities, we should not feel afraid to use the R word judiciously.

Gordon Brown
Even Prime Minister Gordon Brown has used "the R word"

The Governor of the Bank of England, no less, has done - he said it was likely we were entering a recession.

The Prime Minister used a similar form of words the next day in the House of Commons.

What they are driving at is that it is highly likely the third and fourth quarters of this year will prove to be negative.


The key question now is how long will it last? A two quarter recession followed by a rapid recovery in growth will be forgotten by the time the economic history books are written.

Something similar happened in the United States in 2001, but the gloomy economic data in recent weeks points to something more prolonged.

The respected National Institute of Economic and Social Research expects four quarters of negative growth and then stagnant economic output for some time after that.

This would make it similar to previous recessions in living memory.

The recession that began in 1980 lasted five quarters and saw output drop by 4.6%.

A decade later there was a recession of similar duration but with a 2.5% fall in GDP.

In 1991 growth resumed for a short period but there was a further negative quarter in 1992.

So the "feel bad factor" may persist for a while after the end of consecutive quarters of economic contraction.

New experience

Those two recent recessions both saw big declines in manufacturing output - factory closures and sharp rises in unemployment among manual workers were noticeable features.

But manufacturing now accounts for a much smaller share of GDP.

What no-one knows is how an economy with a much bigger share taken by financial services will react in a downturn.

Already, some are saying this will be a services recession.

To people of a certain age the recessions of the early 1980s and 1990s will be familiar.

They may feel that there are ups and downs in the economy, however regrettable, but life goes one.

But after 16 years of unbroken growth, a 21st Century recession, if it is confirmed, will be a new experience for many.

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