“If the economy’s growing, why does it feel so bad?” The joy of maths, part two…

Why does it feel so bad?

Why does it feel so bad?

Yesterday we saw politicians and commentators crowing about bigger than expected economic growth, up 0.8% for the quarter. Yet I keep meeting people who ask “If the economy’s growing, why does it feel so bad?” The answer is all about how the numbers work…
Way back in Nov 2008, I wrote a blog predicting exactly such tales of growth once the recession ended (see Recession’ll end soon: The joy of maths) and it’s roughly exactly what’s happening now. Here’s a cut and paste of some of what I wrote then…

What recession ending really means…

GDP (Gross Domestic Product) basically means the size of the economy, for ease of numbers lets imagine…

UK GDP = £1,000 billion (it’s actually bigger)

Recession then means two quarters of shrinking economy. We know it’s deep so let’s now imagine the economy contracts by 1% a quarter (3 months):

After quarter 1: UK GDP = £990 billion
After quarter 2: UK GDP = £980 billion
After quarter 3: UK GDP = £970 billion
After quarter 4: UK GDP = £961 billion

So a year on we’ve seen the economy shrink by £39bn or 3.9% in a year. Now imagine after the next quarter the economy now jumps to £962 billion, still massively smaller than it was when the recession started. Yet as this is growth of 0.1% the recession is technically over. More so technically even if the economy then shrunk again the next quarter we wouldn’t be in recession because two negative quarters are required.

So when you hear politicians talk about the end of the recession, they may not be talking common parlance. It doesn’t mean things have gone back to how they were. It simply means things have stopped getting any worse.”

What’s happened in practice

This GDP growth graph from the Office for National Statistics is a pretty realistic illustration of the current “the economy’s growing” language that we’re hearing:

Source: Office of National Statistics

It shows that the current rise is nowhere near as big as the recession’s fall, so overall the economy is still substantially smaller than pre-recession.

Think in terms of acceleration and growth

While this is very obvious to those who follow finance, it can be very confusing for others. The best way to think about it is a bit like acceleration and speed when it comes to driving a car.

If someone is driving at 50mph and accelerates to 60mph, they have momentum, but they’re still going more slowly than someone driving at a constant 70mph.

And our economy may be moving in the right direction, but it’s still smaller than pre-recession.

Now please don’t think me a curmudgeon here, I’m not decrying the growth. It’s great news that we’re in the recovery phase and I hope it continues. Yet this does answer the “”If the economy’s growing, why does it feel so bad?” question.

And there are other factors too: personal bankruptcy for example tends to time-lag in recessions. The peek can be two years afterwards, as people who’ve been clinging on finally succumb, so while it’s joyous that things are improving and it lets us look forward to the future, we’re far from out of the woods.

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