Academic journal article National Institute Economic Review

Commentary: International Recession and Recovery

Academic journal article National Institute Economic Review

Commentary: International Recession and Recovery

Article excerpt

Introduction

In the UK already bad output figures for the first quarter were revised down in June to show a contraction of 2.4 per cent. While the national accounts indicate a larger fall (2.6 per cent) for the second quarter of 1958, methods of measurement were then different and it is probable that, were current statistical techniques used for the whole of the ONS quarterly data set which starts in 1955, the first quarter of this year would be the sharpest output fall recorded. It was probably the worst quarterly economic performance in the UK since the 1926 General Strike.

Nevertheless, indicators now suggest that the pace of economic decline is much slower than it was at the start of the year in most advanced countries. Despite the fact that our hope that March would prove to be the bottom of the economic cycle in the UK was contradicted by data for May, our view, in common with much other analysis, is that the period of sharp recession is giving way to stagnation. It would, of course, be a mistake to assume that, simply because the period of recession may be ending, there is bound to be an immediate resumption of normal economic growth.

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Britain's experience of the recession has so far been worse than the average of advanced countries. Of the twenty-eight countries for which the OECD provides quarterly data, average output has fallen by 4 per cent between 2008Q1 and 2009Q1. As figure I shows, in the United Kingdom it has fallen by 5 per cent while in Germany it has fallen by 7 per cent and in Japan by over 8 per cent. We first examine the international nature of the recession and the factors which account for these differences.

The international nature of the recession

The recession has been global in its extent, and probably more so than other postwar recessions. Most of the focus has been on the effect of the recession on world output, as we discuss on page 8. We now expect world output to fall by 1.5 per cent this year. But an impression of the spread of the recession can be better gained by looking at the proportion of countries reporting rising or falling output as summarised by diffusion indices. In figure 1 we show the percentage of OECD countries reporting a rise in output, as shown by their quarterly GDP figures. The figures are weighted by the size of the economy, so that in any period when each indicator shows an increase for the United States, the indicator takes a value of 36 per cent even if output falls everywhere else. The graph also shows periods of recession defined as those when fewer than half of the economies, after weighting for size, are reporting growth for at least two quarters, or when single quarters with fewer than half of the economies reporting growth follow in quick succession. It is clear from the graph that the spread of the current recession is broader than that of the earlier recession in the mid-1970s and early 1980s. It also provides the only occasion in the dataset when more than half of the economies have reported contracting output for at least three quarters in a row.

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The quarterly data do not provide a detailed short-term picture. Monthly industrial production data tend to be more erratic than GDP data, both because monthly data are more volatile than quarterly data and also because industrial production is more volatile than the economy as a whole. But they have the advantage that they are available on a monthly basis. The diffusion index calculated from these monthly data, again weighted by economic importance, points clearly to an easing of the recession in the Spring of this year. The most important factor behind this shift has been the beginnings of a recovery in Japan which has a weight of 12 per cent in the index. This comes after an extremely sharp contraction in industrial production there.

While the recession has been worldwide, one can nevertheless investigate the factors which might explain, for example, why Germany's experience is worse than our own and we now examine this. …

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