The UK narrowly avoided a recession in the latter half of 2022, it was revealed on Friday morning as the Office for National Statistics (ONS) published its estimates of gross domestic product (GDP).
But what exactly is a recession, how important or not is it that we avoided one and could the ONS change its mind later?
We explore those issues below.
– What is a recession?
There is no real definition. It is seen as a time when the economy is declining, but there is no globally standardised way of saying exactly how much decline and exactly how long the period has to be.
In the UK, the most generally accepted definition of a recession is two quarters in a row when gross domestic product (GDP) falls.
But that means even if GDP drops by 0.01% one quarter and 0.01% again the next we are technically in a recession.
That would be a very shallow recession and much less painful than if GDP shrunk by 3% one quarter and rose by 1% the next – which would not be a recession.
Other countries measure recessions in different ways, taking into account the size of the drop or other factors.
The UK economy shrank by 0.2% in the third quarter of 2022 – between July and September.
This meant that if the economy shrank again in the fourth quarter – October to December – we would have been in a recession.
According to the ONS, GDP rose by 0.5% in October and 0.1% in November. But experts widely predicted that GDP would fall in December, which could wipe out that growth and potentially make GDP negative in the fourth quarter as a whole.
That could have landed the UK in a recession.
In the end, the recession was avoided. The economists were right and GDP did drop heavily, but only to 0.01% growth rather than pushing it into negative territory.
This meant the UK avoided a recession by the narrowest of margins.
It was the second time in 2022 the UK narrowly avoided a recession. The ONS originally thought GDP shrank in the second quarter too but it later revised this to 0.1% growth.
– If GDP grew by 0.01%, why is everyone saying growth was flat?
Simply because the ONS, when it reports GDP data, only reports it to one decimal point.
This means 0.01% is rounded to 0.0%, making growth appear flat even when it was slightly positive.
No. Firstly it is important to remember this is not the final figure for GDP in the fourth quarter – just the first reading.
The ONS regularly reviews its GDP figures so it is possible that at some point in the future we find out GDP grew by more than 0.01%.
Alternatively, GDP could be revised down and show the economy actually shrank by 0.1% in the final quarter of 2022. If that happens, newspapers are likely to write new headlines saying the UK was in a recession.
The next time these figures will be revised is March 31.
– How much does it matter that we narrowly avoided a recession?
Not that important. The UK’s economy grew by 0.01% but it could just as easily have shrunk by 0.01%.
That would technically have tipped the UK into recession but the difference between the two is very slim.
What matters more is how much GDP drops – the depth of the recession.
And ultimately, at the moment, regardless of what term economists use to describe it, economic conditions are tough for millions of people across the UK.
– Will the UK go into recession this year?
Right now it is difficult to say. The Bank of England thinks so. But then again, just a few months ago the Bank of England thought the UK would be in recession in the second half of 2022, a forecast that was slightly off.
The problem is that all recession forecasts at the moment include such slim drops – a fall of 0.1% here or 0.2% there – that even a small change can throw off any recession predictions.
