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Why I confidently predict this recession won’t be as ‘severe’ as the last

Why I confidently predict this recession won't be as 'severe' as the last

Why I confidently predict this recession won't be as 'severe' as the last

I normally say I don’t do predictions, so you may be surprised to see me putting my neck on the line in such a way. Yet I haven’t suddenly bought a crystal ball or grown cahoonas the size of an ox, this is a natural conclusion on the back of the political spin of recession maths…

A recession is strictly defined as two successive quarters of negative growth – in other words, the economy shrinking for half a year. Yesterday it was announced we’d had one quarter down 0.2%, so even though it’s down, unless we get another one – it’s not yet a recession – but the general feeling is it will be.

Yet just think about this definition for second. A ‘recession’ isn’t about how things feel, the perception of economic affairs, it’s about whether things are good or bad. Politicians can rightly say we’re not in recession even when many are feeling the pain.

Look at this table below – I’ve designed  a ridiculously extreme example of how the definition may not reflect the real picture:

 

Technically not a recession year

Technically a recession year

1st quarter

Economy up 0.1%

Economy up 10%

2nd quarter

Massive crash – down 20%

Things plateau – down 0.1%

3rd quarter

Things stabilise – up 0.1%

Slight downturn – down 0.4%

4th quarter

Double dip – down 20% again

Recovery – up 10%

Total annual growth

Down 36%

Up 20%

The definition of recession also explains why over the last couple of years even though the economy has been teetering, technically we’ve not been in recession. Back in 2008 I confidently predicted that – not out of any prescience, just due to the simple maths (see my Recession will end soon: the joy of maths blog).

Why this recession is unlikely to be as severe as last time

I’ve already seen one headline of "this recession won’t be as bad as 2007/8" and indeed it’s almost certainly accurate, but quite meaningless.

Our economy contracted substantially back then and has never recovered, we’re still in the mire, we’ve just had stagnant or minor growth for a few years. Thus we’re not going to fall much now as there isn’t that far too fall – unless we have catastrophic economic collapse (let’s hope not eh?).

The fact this recession won’t be as steep isn’t the same as saying it won’t be bad. Recession is all about momentum – which is how fast things are moving, and doesn’t factor in the overall economy. 

Take a driving analogy, if you accelerate to 80 mph then slow to 79mph you may’ve slowed down but you’re still going fast.   

Yet with our economy we were travelling at 70mph, in 2007 we slowed to 60mph and aren’t going much faster now, so if we drop to 58mph now, while we haven’t slowed down as much as in the last recession – we’re still going far slower than we were when this all started.

Not everybody is struggling

If you’re reading this as a doom and gloom blog, please don’t. In many ways the message is we’re already in it, so hopefully it won’t get much worse.   

Yet even in a recession you can’t draw too many conclusions on what it means for individuals. I’ve corrected a good few interviewers in recent times who’ve asked me: "everyone is struggling, what should we do?"   

Of course ‘everyone’ isn’t struggling, there are still many with good jobs, getting pay rises, with savings, no debts, and possibly low rate tracker mortgages. You only need to see this How much are you worth? 2012 poll result to see that.

The key to recession is ‘more people than usual are struggling’, with many feeling income squeezes, costs on the up, benefits dropping and worries about job security. It’s crucial to address those issues, but still we must be careful not to start seeing our economy as a blanket of individuals with a homogenised financial situation.

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