Statistically Speaking: The R Word: Decoding ‘recession’ and looking beyond GDP.

The R Word: Decoding ‘recession’ and looking beyond GDP.

Feb 20, 2023

With news headlines proclaiming the UK has ‘narrowly avoided a recession’, we decode the ‘r’ word and explain why this sometimes misleading term is one the ONS is often cautious to avoid. We get the lowdown on GDP (Gross Domestic Product); discuss whether its time as the yardstick for measuring the success or failure of the world’s economies is coming to an end; and hear how the ONS is already looking well ‘Beyond GDP’ and introducing broader measures of social wellbeing and the environment to provide us with a more holistic view of how society is faring.

Joining Miles is ONS Director of Economic Statistics, Darren Morgan, Chief Economist, Grant Fitzner; and Director of Public Policy Analysis, Liz McKeown.

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Transcript

MILES FLETCHER

Welcome again to Statistically Speaking the official podcast of the UK’s Office for National Statistics. I'm Miles Fletcher, and this time, we're going to talk about a very famous and long running statistic that’s still regarded as the single most important economic indicator of them all. I'm talking of course about GDP (Gross Domestic Product), the expansion or contraction of which is the yardstick against which the success or failure of the world's economies is measured. It's been around a long time, since around the time of the Second World War, in fact, but is its pre-eminence now coming to an end? GDP misses some things out - that which matters, as was once memorably claimed. So we'll be talking about how the ONS has been updating GDP to keep it relevant and developing new complementary measures of economic and social wellbeing that could perhaps, in future, supplant GDP itself. And in the current economic climate, we cannot avoid the “R” word. What exactly is a recession? How much does it actually matter, if it's only a technical one? Is it the difference between economic disaster and salvation? Spoiler alert, it really isn't.

Anyway, we have a panel of top ONS folk to explain it all: Darren Morgan is director of economic statistics production and analysis, Grant Fitzner is Chief Economist and director of macro-economic statistics and analysis, and also with us is Liz McKeown, Director of Public Policy Analysis, who is leading the drive towards these broader measures on social and economic welfare.

Welcome, everyone.

Darren to start with you. You are responsible for the production of the UK’s GDP estimates. So let's start by reminding ourselves what precisely it measures, it's basically seeking to put a value on all economic activity over a given period.

DARREN MORGAN

Yeah, so we look at GDP and we measure the economy in three different ways. First of all, we do it via what you call the output approach, and most simply, that's everything that's produced in the economy, and that can be cars rolling off the production line, that can be a lawyer providing advice as a service, and it can be public services as well. So surgeries, GP appointments and so on. So everything we produce in the economy. We also look at measuring the economy, everything that is spent, so that could be you and I in household, spending money in the shops or on leisure activities. It can be businesses spending money on goods and services. And it can also mean the government spending money, so everything we spend as well. And the third way we measure GDP is the income approach, which is basically everything that's earned in the economy. So for us in terms of households that's wages and salaries, for businesses it’s profit, for example. So we measure everything we produce, everything we spend and everything we earn, and in principle, they should all add up.

And you're boiling it down then, a vast amount of data flowing into the ONS, boiling it all down to one single indicator.

We do, and we do that by approaching thousands and thousands of businesses asking them about their performance. We speak to thousands of households about their behaviour. And we also use a lot of data already available withing government, so what we call administrative data - data that already exists. And we bring all those different data sources into the building, we look at it and we confront it, and we come up with ultimately, as you suggest, a single number on the growth of the economy.

MF
What's changed in the in the collection of data now? How timely a process is this?

So in the UK, we've got one of the timeliest measures of the economy in the world. And we only have one of two countries who produce a monthly measure the economy, so we do it much more quickly, and obviously it is completely different to how we did it say, even 10 or 15 years ago. We collect most of our data now from businesses online. Whereas previously we used to send a questionnaire to them, used to write the questionnaire and they would send it back to us, and that could take a week or weeks to do that. Businesses can fill the form in now sat at their desk online, do it very quickly and it reaches us straightaway.

And you mentioned administrative data as well. So that's coming from other parts of government. What are the main sources there? How is that gathered?

So that's correct. So what we try to do is minimise the burden on businesses and households, so some businesses may have to complete a tax return to HMRC for example. So we are able to use that information and bring it in, so that's one example. Pay As You Earn, people who use pay as you earn systems, will be well aware that we use that in our labour market numbers. But we use lots of different sources that are already available across government, and we reuse them for statistical purposes, like I said, to provide better estimates, because that data tends to be very good, but also to minimise the burden, as I said on households and businesses at the same time.

And what is the coverage, in terms of what's included, how has that evolved in recent years?

So in a way, in terms of what we call the boundary, the economic boundary, that has actually stayed very similar over a long period of time. It is very traditional in terms of the boundary we measure. So, like I said, it's sort of business activities, household activity and government activity. But it is along those lines about how much is produced, how much is spent, how much is earned, but the boundary for the economy has been very similar for 50 years.

Nevertheless, there are some things included in GDP which might surprise some people. For example, in the most recent GDP release we talked about the fall in the number of pupils in classrooms in the last quarter of 2022.

The public services was actually a really key indicator for the number that we published for December, and we saw a fall in the number of GP appointments, a fall in the number of operations, less vaccinations being given because the autumn booster campaign tailed off. And we also saw lower attendance in schools, because in the lead up to Christmas not so many pupils will go into school as we normally see. And the reason why we measure that, as you can imagine we measure teacher salaries, doctor salaries, we measure how much is invested in the health service, how much is invested in schools, and obviously those schools and hospitals buy goods and services. So, it's a really important part of the economy. So of course we measure the goods and services that they produce as well. It's a really important part of the economic measurement for GDP.

And I think I’m going to use it to motivate my children in the mornings as well. When they go off to school I’ll be reminding them of their contribution to our economic performance.

They certainly are. So it's a really good way to get them through the school day, Miles.

But there's a serious point underlying this, and there's a bit of a propaganda point for the ONS here as well, as it because we are actually taking real measurements of public sector activity, and it's been said that some countries just make broad assumptions about that activity. What do we do that other countries don't?

You’re absolutely right, Miles. And that became most marked during the lockdowns during, the COVID pandemic. So we measured, if I can give schools and education as an example, we actually measured how much education was being provided to pupils during a lockdown, whether that was face-to-face in schools, or whether it was remote learning, or whether unfortunately, in some cases, there was no learning at all. We measured that directly, whereas perhaps some other countries basically measured the number of pupils. So as you can imagine, the number of pupils is the same whether they are getting taught or not. So in the pandemic we showed a sharp fall in education during some of the lock downs, but we've seen a faster recovery in the years that followed. Whereas if you look at other countries, their measurement of education has been far more stable over the most recent years because the numbers of pupils doesn't really change.

They are pretending that the schools were open, when in fact, they weren’t. Anyway, that's just part of this enormous data gathering operation, bringing in all this data, and it takes around about six weeks to produce the preliminary estimate, which you say is among the quickest of the estimates, but of course that's only part of the story, isn't it?

That's pretty quick, six weeks, but we do produce an estimate for all three measures, we produce a measurement how much is produced, how much is spent, and how much is earned at that point in time. So we do that, but obviously, we only have so much data at that point. You know, we have quite a lot of data to actually because those surveys are very timely, but not everything.

As a percentage, it's about 40% isn’t it?

That's correct. But obviously our data collection doesn't stop at that point. We continue to bring new data in. And that's why we publish the latest estimate, which covers more detail, more granularity, different parts of the economy. And that additional data that's brought in allows us to do that at a later stage.

You have a couple more months to produce that one, and that's based on pretty much all of the data we're going to get.

Yeah, it's over 90% of that stage, it’s about 90%. So yes, we have between the first estimate and the second estimate, we do get a lot more data in.

And therein lies, what some people might say is one of the weaknesses of GDP, and particularly when making quick assumptions about the economy. There's a trade-off here isn't there, about wanting to know broadly where the economy is going, and making really, really hard and fast assumptions about what's happening. And therein lies the whole issue of revisions, revising GDP. Now, it's important for everyone to understand that when the ONS revises GDP, it's not correcting its mistakes is it.

What you’re describing there Miles is a classic tension in statistical production. So we could say to everybody, our users, no, we're not going to publish anything until we get all that data, all that 90% of data. But to do that, you're going to have to wait about 80 days. Or what we could do is drag an earlier estimate based on less data, but still not a really good estimate, but you could have that 40 days quicker, 50 days quicker. So you know, there's that tension between timeliness and quality. And I think the way we do it, I think it's brilliant. We published two estimates initially, and that’s for the quarter. The one that's a bit quicker based on less data, and the one later based on more data content. But what we do to help our users is we have a really detailed revisions analysis between those estimates, so people can look and judge typically, how often and how much is that data revised when we publish. So they have the full information in front of them to make judgments if they have to. And I think we strike the right balance taking that approach.

What is the ONS’ track record in doing this? Because have there been occasions perhaps, as has been suggested, sometimes that the early data can be misleading, and in fact, the economy might be heading in the opposite direction.

So if you're looking at revisions analysis, it's pretty good, you know, within the first estimate, and that second estimate, and so revisions are typically very small, and importantly, unbiased, they're equally likely to be a revision up or a revision down, and that's really, really important. I think when a real spotlight is shone on revisions, that’s when the economy is around zero, you know if you have a 0.1 revision, which is a small revision if your economy is going along at 0.8, 0.7%. You know, whether it’s 0.7, 0.6 and so on, people go ‘Ah, so what?’. But if the economy is going around zero, or 0.1 or –0.1, that 0.1 revision can change the sign, and people get very excited about that. But actually, it's a 0.1 revision, and that's when the spotlight is really, like I said, is shone on the revisions performance

As it was in our most recent estimate of quarterly GDP, the final quarter of 2022 when there was a big fat zero in terms of growth. Now, that led to headlines in some very respectable media organisations that went “UK narrowly avoided recession”. Well, did we?

So we did technically yes, we did. Absolutely. Because it wasn't negative. That was our Q3 estimate of the economy was for a four, so if Q4 fell for economic growth, a technical recession, which is widely recognised as two consecutive quarters of negative growth. Yes, we would have been in a technical recession. But I think you've just highlighted how it makes sense to look more broadly at the economy because whether it was 0, or –0.1, 0.1, how different really was the economy at that point in time? I would say the economy was broadly flat.

Because if you're beholden to this idea of a technical recession, a couple of months down the line we might say hang on, our better estimate based on 95% of the data says actually it was just slightly down, and therefore the headline writers say, “Oh, we were in recession after all.”

Exactly. I think that just highlights, again, being sensible in terms of how you look at the economy overall, because really the economy, if it's a 0.1 revision ,if that's what happens in it in a few weeks time, is the economy fundamentally different to what it is at that moment? I would suggest not, but you're right, I would imagine that it would get splashed that the UK is now in recession, and coverage will be significant because of that.

And it's fair to say that in the past these technical recessions, there was a double-dip recession wasn't there about 10 years ago, that made a lot of headlines at the time. It's not in the figures anymore.

No, it's not. It's been revised and that period of our economic history when we were around that flat period for the economy. So the revisions have been relatively small in that period, but you're right, we were in recession and because we had revisions from later data, we no longer were. And as you suggested people got very excited about that. But really, Miles, the economy was in exactly the same position as it was in our first estimate.

So a strong message there listeners, when you hear people talk about a technical recession, bear in mind, that may not be what it sounds like. In fact, it probably almost certainly isn't.

Good advice, Miles.

MF

Grant, to bring you in on this then, from an economist's perspective, it's fair to say then that in fact, there's no definition of a recession that's really official or formally accepted anywhere. It's certainly not something that the ONS talks about.

GRANT FITZNER

No, I mean, ultimately, it's a matter of judgement. And of course, economists spend a lot of time arguing about these things. In fact, it was so bad in the US that academic economists, as part of the National Bureau of Economic Research set up a committee to discuss and agree on when business cycles were, well when recessions started and when they ended, so that when they were comparing their research they were all working off a common framework. Now, that sounds great, but the problem of course is with this being academics, they looked at a wide range of data, and they typically took several years after a recession had occurred before they would put definitive data out of it. Now, that's fine if you're publishing economic history, but if you're a journalist or indeed if you're working at the Office for National Statistics and you want to have an idea of what's going on now, you need something that's a bit closer to real time, and that does, as Darren said, involve a degree of judgement. But I think it's fair to say that the common sense understanding of a recession is a prolonged and significant downturn in economic activity. So not just one or two quarters, and not just a 0.1, but actually something a bit more substantial, as indeed we've seen in the 70s and the 80s, and of course, in the global financial crisis that kicked off in 2008. So they typically last for a while, and they do have quite a significant impact on the economy, households and business.

In fact, that’s a lot more serious isn't it, than the definition that's used as a sort of working rule of thumb, which is two consecutive quarters of economic contraction. In fact the origins of that are very murky, really, nobody actually seems to know precisely where it came from. One of President Nixon’s speech writers seems to be the main suspect.

Well, possibly, but it has been more widely used. I think journalists need something quick and simple to understand, and I guess this meets the bill. But imagine if you had a –0.1 in one quarter and then a –0.1 in the next, and then they were subsequently revised away, I don't think anyone would seriously call that a recession. And just the point about the length as well, if you look at the 70s, 80s, or 90s, recessions typically last about three years. That's how long it took for the level of economic activity to get back to the pre-recession levels, and indeed for the global financial crisis that kicked off in 2008, it took four and a half years before growth was back at pre-recession levels, so an incredibly long time. And I think just looking at the pandemic and the impact that that had in 2020, it's a very different set of events. We had two negative quarters and then the economy started to recover after of course, a very large fall. Now that's unusual. And of course that was because of this shock of the pandemic and lockdowns. Whereas typically, these things take quite a bit longer to kind of work their way through the system.

And if you look at the path of GDP on the time-series graphic on the ONS website, it really goes off a ski slope doesn't it, really quite dramatically as the pandemic starts and then kind of sharply recovers, and then it's kind of clawing its way back now.

That's right. And so things are often slower than we may be used to in recent years. And to give you an example of that, at the moment, we have the Bank of England raising rates quite aggressively so interest rates have gone up, mortgages have gone up, businesses are facing higher costs of borrowing, but the labour market still looks pretty robust. Now historically, if you look at past recessions, there's always a bit of a lag between, for example, central bank tightening or some sort of supply shock and for that to work its way through in terms of employment, business, profitability, and so forth. So these things often take longer than people expect. Now, I'm not saying of course, that that means we're in a prolonged economic downturn. I mean forecasters differ as to how severe and how long the current period of economic weakness is likely to be and indeed, people disagree on whether we may even enter recession this year. It's that close.

But we'll know if we’re in a significant downturn, a genuine recession or whatever label we want to apply, when it happens, but at the moment we seem to be in sort of somewhere in between. Disappointing though that might be for headline writers.

And the sort of things that you would typically look at would be more businesses going out of business, so business liquidations, weak retail spending, which of course we have seen, driven by the big increase in the cost of living over the past six months, and significant increases in the level of unemployment. Those are three of the things that you would typically look at. Possibly also weaker industrial production is often associated with recessions as well.

So does that suggest then, talking about the action being in those other indicators, does that period for the economy, perhaps an economy on the cusp of growth and contraction, does that highlight one of the major limitations of GDP as a measure? How seriously do economists regard it now? Does it remain that big, totemic bellwether of economic success or failure?

Well it is a broad and pretty comprehensive measure, so it does include income, expenditure and output. So a lot of what you would typically consider economic activity, but of course it doesn't cover everything. It doesn't cover anything produced in households, at the moment it doesn't properly capture what's going on in the natural environment. So it's certainly not broad enough to cover every kind of activity that produces something of value. And it typically focuses on things that can be measured or quantified, or have a value ascribed to them. So the market sector is the largest part of the economy that we measure through gross domestic product, because there's also the non-market sector, public sector charities, etc. They are a bit harder to measure. One of the interesting differences between the UK approach and some other countries is that we spent quite a bit of time trying to measure not just how much we spend on health and education, but as Darren said, what actual activity, what outputs, are we getting from that investment?

Yeah, I mentioned at the top of the podcast, there's this famous quote from Robert Kennedy, of course, famously US Attorney General and then presidential candidate. He actually said the problem with GDP is it does not allow for the health of our children, the quality of their education or the joy of their play. It doesn't include the beauty of our poetry or the strength of our marriages, intelligence of our public debate or the integrity of public officials, etcetera, etcetera. It seems to me that the demand then for more holistic measures of well-being or progress, in fact goes well beyond economics, but is there more that economics can contribute? And what is the ONS doing towards that?

Yes, there is more that we can do. And indeed, we have been doing that. So we've created a series of what we call satellite accounts, which measure either different parts of the economy or activity, or indeed measure things that are currently outside of what we call the national accounts. So for example, we've been publishing at the ONS for quite some time now an annual series of natural capital accounts, which tried to convey you what's been produced out there in the environment. Clean air, for example, is an output of trees and vegetation and parks. We try and put estimates around those. Now, of course, there's some challenging methodological issues about how you measure some of these things, but I think we've had quite some success in actually putting some values around those. And at the international level, the current system of national accounts was devised back in 2010, there's quite a lively, if indeed statisticians can have a lively debate, around what the next system of national accounts will look like, which is due to come in 2025. And one of those very issues is do we start to bring the environment more into those measurements.

So not quite the beauty of our poetry but certainly the landscape, the value of our environment.

Exactly. And I suppose the other misconception about GDP is people often see it as a measure of well-being. It was never really designed to play that role. It's a measure of economic activity. Now, of course, there’s a clear link between economic activity, prosperity, and well-being, but they're not the same concept.

MF

So in order to be more inclusive, and to fully reflect activity in its broadest sense, we're having to go much further than that. And a bold initiative in that direction, started more than a decade ago now, was the national well-being programme launched by the then Prime Minister David Cameron.

Liz McKeown, the National well-being programme was, it was not taken wholly seriously. I recall at the time it was dubbed as Cameron's Happiness Index, and the idea that we could dump GDP and inflation and so forth was taken with some mirth. Ten years on, how far have we come to developing alternative measures like that, and how seriously have they been taken?

LIZ MCKEOWN

I think we've come a long way, but perhaps it's worth us looking back to those days of 2010 and what we did then, we wanted to know what matters most to people. And we went out and asked them and we had over 34,000 responses to that debate. And that allowed us to start measuring well-being for the first time as a national statistical Institute, that debate, understanding what really mattered to the public, getting those responses allowed us to develop 10 domains of well-being. These are the things that people were saying really mattered to how they felt as individuals, as a community, and you know, ultimately as a nation. And the domains that we developed there were personal well-being, they were our relationships, our health, what we do, where we live, our personal finances, our education and skills, the economy, governance, and the environment. And under those 10 domains, we developed a number of measures, both objective and subjective, which allowed us to begin to get to that question of how are we doing as the UK in a more holistic way than economic measures can do alone.

And what story has that told over the years? How were we doing? How are we doing?

I think it opens a new lens and allows us to think about that quite differently. Perhaps I could take an example of how we thought about well-being during the pandemic, there we were wanting to understand what's the impact of lockdowns more broadly, and we could use wellbeing measures to help us understand that. We could see how personal well-being and levels of loneliness were, you know, really negatively impacted during the lockdown, and then we could see the improvements as we came out of them. We could see how that differed by how men and women were doing. We saw during the pandemic women's well-being falling below men's for the first time, and so we could understand a different dimension of how society was reacting to one of the big issues of our time.

And when we ask people how happy they are, they tend to give quite a positive response, don't they?

Well, I think it's important to say that wellbeing goes beyond just asking people how happy they are. So personal well-being does look at people's happiness, it looks at their levels of anxiety, and it looks at how satisfied they are with their life and how worthwhile they think the things in their life are. But the broader concept of wellbeing is understanding how people are doing across these domains that I mentioned earlier.

Now this isn't just suddenly what's been going on in the UK, there's something of a global movement to broaden out our approach to measuring not just personal well-being, but economic well-being as well. And an important part of that is the UN's Sustainable Development Goals. And put quite simply, it's a global initiative to find out if the world is becoming a better place, and to set targets and then policies from that.

Yeah, absolutely Miles. And I think it reflects doesn't it that people do want to understand progress in that multi-dimensional way. They want to understand not just how we're doing economically, but actually what the impact on our environment is, what the impact on our society is. And those indicator-based approaches, be they the well-being measures that we've developed here in the UK, be they the Sustainable Development Goals, they're allowing us to take that broader check on progress or sort of multi-dimensional check on progress and allows us to see things that we couldn't see if we were only looking at the core economic statistics that you were discussing with colleagues earlier.

Now on GDP day when the ONS produces its quarterly estimates of economic performance in that traditional sense that we talked about with Darren, there are two important publications that do get slightly overlooked on the day but are well worth highlighting now. And the first of those is one entitled quality of life in the UK. Sounds intriguing. Tell us about that.

These two publications we added to the mix on GDP day last year, and why did we do that? I think it really wanted to reflect how important it is that we look at progress in that multi-dimensional way that I was talking about earlier. That we give people the chance to see not just what the latest economic data is telling us, but we are also looking at how life is going for people in the UK, and that's where the quality of life in the UK publication comes in.

Break down the elements for that if you would, tell us what sort of narrative it's providing at the moment about our quality of life.

Yeah, so this is a publication that every quarter looks across those 10 domains of national well-being, personal well-being, relationships, health what we do where we live personal finance, economy, education skills governance in the environment. It looks at the measures we have under those domains and says well, what news have we got from the last quarter. And I won’t go through all that here, I encourage you to go and have a read of it, it makes interesting reading. But for example, on the personal well-being side, we have seen in the last quarter a drop in the percentage of adults who've seen very high levels of life satisfaction and happiness. There's been a decrease in that. So that's one to watch, and one to keep an eye out for. But the publication goes across the 10 domains and yeah, as I said Miles, well worth a read

An interesting alternative view as well at a time when the classic economic data was showing a big zero reading. In fact, there's another aspect in which an awful lot is going on, and obviously a downward trend there in some respects, at least.

Absolutely. And users are telling us that they want to understand what's going on across the country in a more holistic sense and understand a bit more about our societal measures, but also about our environmental measures. And I guess that sort of takes us on to the other publication that we put out on GDP day on climate change insights. And if you take all those three publications as a whole, so the quarterly GDP figures, the quality of life in the UK and the climate change insights publication, you're basically allowing the public policymakers to look and understand, okay, what's the latest developments in the economy? What's the latest developments in society and people's well-being and what's the latest environmental developments? And it's allowing us to begin to answer that question, how is the UK doing in a much more holistic way than we've been able to before.

So I guess what I'm taking away from this lightning tour of a fascinating and extremely diverse environment, is that when you see headlines saying the economy is neither growing nor contracting, there's a much, much bigger story out there and there's a much bigger story to be learned by looking at the ONS data.

That's exactly right. And we're not standing still either as an office as well. We want to make sure that what we're measuring is still what matters most to people. As I said, that's how we started the well-being programme in the first place by going out to the nation and asking them what matters most. That was over a decade ago, and obviously, a lot has changed over the last 10 years. So it felt like a good time to take that step back and think, are we still measuring the best things to measure in our well-being programme, and the National Statistician kicked off a review of those measures back in October. So we're working through that at the moment and in the spring we’ll be presenting some recommendations for how we can do this even better in the future.

MF

And where do you think is going to lead? Do you think GDP might be toppled off its perch and we'll be able to produce one big comprehensive indicator that would bring in all that economic activity as well? Is that Is that where we're headed?

I think GDP will always be an influential statistic. As a measure of the productive economy there are huge strengths to it. And strengths are continuing to increase as it becomes, as I think Darren mentioned earlier, more timely, better quality. So GDP is important and will remain important for ONS. But we also know that looking at progress more broadly than GDP is more important than ever to members of the public who want to understand how we're doing, but also to policymakers who are looking at future policies and providing statistics and insights that help both the public and policymakers to make the best possible decisions. That is what we are, as a national statistical institute all, about. So GDP, important, but actually having a full range of data and statistics and insights that go beyond that. That's where the future is.

Darren, as the person responsible for producing GDP, that's a challenge for the future then?

DARREN MORGAN

That’s right and I think Liz summed it up really well. I think GDP is important, but it's not everything.

MF

Well thanks very much to all our guests for a fascinating discussion there, and we'll put links to some of the ONS publications we discussed in the programme notes for further reading.

I'm Miles Fletcher. And thanks for listening to Statistically Speaking. You can subscribe to new episodes of the podcast on Spotify, Apple podcasts, and all the other major podcast platforms. With thanks to our producer Steve Milne, it's time to say, until next time, goodbye.