Faisal Islam: Should we care that the UK is in recession?

Britain is now officially in recession.

GDP fell by 0.3% in the last three months of 2023, a sharper decline than economists had expected.

This gave us two consecutive declines in GDP after a 0.1% decline in the previous three months, between July and September 2023.

An economy falling over two consecutive three-month periods has been the most widely used rule for entering a recession around the world for decades.

More on that in a moment.

The best way to define the overall experience of the past six months, or even two years, is “zero growth” or “stagnation.”

This is noteworthy and concerning, and appears to improve only marginally over the course of this year. It was the Prime Minister himself who decided to set a vague target on developing the economy by the end of last year.

Around the world, there are different definitions of recession.

In the United States, a panel of eight respected private sector economists meets and decides whether there is a “significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.” This determination usually occurs more than a year after the event, and is based on monthly rather than quarterly data, not just the size of the economy. It is more comprehensive, more grounded in economic theory, but less timely.

Under the US definition for 2022, two consecutive quarters of contraction would not be considered a recession, due to the strength of the labor market. Under this American approach, the United Kingdom would not necessarily be in a recession.

But let's go back to why a recession is usually defined as two consecutive quarters of economic decline.

A deep dive into the BBC News archives can help here.

My predecessor as economics editor, Peter Jay, told the Today program in late 2008 – just before the Great Recession – that the definition was “ridiculous” and that it had been concocted “on the back of an envelope” in 1967 by the government. Respected economist Art Okun, to help his boss, US President Lyndon Johnson, out of the political impasse.

Mr Johnson wanted to avoid headlines of a recession beyond a one-quarter contraction, so Mr Okun suggested defining it as two quarters instead. Other sources indicate that Okon put forward this idea in a speech in the early 1960s. Baron Guy was “in the room” when this important part of the strategy happened 65 years ago.

This definition has stuck around the world, except in North America.

More often than not, two consecutive quarters of declining GDP have coincided with what all economists agree is a recession. But there are exceptions, such as in the United States in 2022.

In fact, it is rather significant that the government itself used the definition of “two quarters”.

In his Budget speech last year, Chancellor Jeremy Hunt told MPs: “Today, the Office for Budget Responsibility predicts that, due to changing international factors and the actions I am taking, the UK will now not enter a technical recession this year.”

Government ministers have used this phrase constantly in the past year.

At BBC News, as with almost all other media, we have used this definition consistently too, over the decades, both in our coverage of how the UK has avoided a recession, and how other countries have reached this threshold.

However, it is important to distinguish between the period of broad zero growth we have just witnessed and the beginning of significant, tangible recessions such as occurred during the pandemic and the great financial crisis of 2007-2008.

A few forecasters believe this will continue into this year. In fact, if the economy is currently growing, as expected, in the January-March period, it may end even as it is officially defined.

But this clearly raises some interest, especially in light of the Prime Minister's promise to “grow the economy.”

In fact, in the absence of any statistical adjustments, the “red word” may remain dominant in the economy until mid-May.

So now we know that there have been two negative quarters in a row, we will use, as consistency dictates, the “R-word,” but we will also add appropriate context.

For many economists, even what might be called a “partial” or “mini-recession” would be a fairly benign outcome given the effects of the worst health crisis in a century, the worst energy shock in half a century, and 15 years of economic stagnation. Eliminate near-zero interest rates in 15 months.

But it will rightly highlight a more fundamental issue: that this economy is not growing.