When is an Eco­nomic Re­cov­ery Not a Re­cov­ery?

Financial Nigeria Magazine - - Economics and Monetary Policy -

What do we mean when we say the econ­omy is re­cov­er­ing from a re­ces­sion? Do we mean it has started grow­ing again, or do we mean it is re­turn­ing to its pre-re­ces­sion trend? Brief re­search sug­gests there is no stan­dard def­i­ni­tion, but Wikipedia is clear it is the lat­ter:

“An eco­nomic re­cov­ery is the phase of the busi­ness cy­cle fol­low­ing a re­ces­sion, dur­ing which an econ­omy re­gains and ex­ceeds peak em­ploy­ment and out­put lev­els achieved prior to down­turn. A re­cov­ery pe­riod is typ­i­cally char­ac­ter­ized by ab­nor­mally high lev­els of growth in real gross do­mes­tic prod­uct, em­ploy­ment, cor­po­rate prof­its, and other in­di­ca­tors.”

The sec­ond sen­tence is cru­cial here. All economies grow on av­er­age: they have a pos­i­tive trend growth rate. An eco­nomic down­turn (or worse still a re­ces­sion) in­volves the econ­omy dip­ping be­low trend (or in a re­ces­sion not grow­ing at all). Typ­i­cally when­ever that has hap­pened in the past, most economies make up for the growth they lost in the down­turn, by grow­ing more rapidly than trend once the down­turn is over. This had cer­tainly been true for the UK. We ex­pect economies to grow over time be­cause of tech­ni­cal progress, so it seems al­most ob­vi­ous that a re­cov­ery must in­volve above av­er­age growth un­til we re­turn to some­thing like an un­der­ly­ing trend.

Imag­ine a 5,000 me­tres race. *Sup­pose an ath­lete trips and stum­bles, and is left be­hind by the main pack. If 5 min­utes later I said the ath­lete was re­cov­er­ing, would you think this meant that they were get­ting back to their pre­vi­ous pace but still well be­hind the main group, or that they were get­ting back in touch with the main pack? I sus­pect you would think it meant the lat­ter, and you would call a com­plete re­cov­ery when they were back within the main group. If you think about the main group as the un­der­ly­ing trend path of the econ­omy, then a re­cov­ery in growth means get­ting back to­wards this trend path.

For this rea­son I would de­fine a re­cov­ery from re­ces­sion as above trend growth, and I think most macroe­conomists would do the same. Here is re­cent quar­terly growth in UK GDP per head.

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