30 Jul 2013

What is an economic recovery?

Some definitions of "Economic Recovery"
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. - Wikipedia
A early expansionary phase of the business cycle shortly after a contraction has ended, but before a full-blown expansion begins. During a recovery, the unemployment rate remains relatively high, but it is beginning to fall. Real gross domestic product has begun to increase, usually rapidly. However, because the contraction remains fresh in the minds of many, it may not be immediately clear that the trough of the contraction has been reached. - Economic Glossary
Phase in an economic cycle where employment and output begin to rise to their normal levels after a recession or slump. - Business Dictionary
A period of increasing business activity signaling the end of a recession. Much like a recession, an economic recovery is not always easy to recognize until at least several months after it has begun. Economists use a variety of indicators, including GDP, inflation, financial markets and unemployment to analyze the state of the economy and determine whether a recovery is in progress. - Investopedia.

So let's take a brief look at some of the relevant quantities: GDP, unemployment and inflation.

source: UK Public Spending
We already know that GDP is rising very slowly, and that many commentators are saying the the 0.6% growth of Q1 2013 is unsustainable. If anything the fall in real wages is likely to contribute to reduced demand for basics. I've dealt with recent GDP trends recently. And with changes in the way GDP is adjusted for inflation which have resulted in higher GDP estimates since 2011.

Source: BBC
Unemployment is still or around the levels that resulted directly from the 2008 crisis. There was a spike in 2011 that subsided, leaving us at the levels of mid 2009. The trend seems to be flat at present. These figures do not encompass the under-employed either. This is a growing problem pointed to by some pundits. With the workforce being pushed into zero hour contracts and so on we're seeing the workforce unable to make enough money to make ends meet - they want to work more but can't. And many of these people have to avail themselves of the Landlord Subsidy (aka Housing Benefit) in order to keep a roof over their heads.

Source: BBC
Inflation has jumped about quite a bit over the last few years - especially the RPI which includes housing costs. But generally speaking it has been higher than government targets and higher than wage rises. Indeed wage rises have been below inflation for a long time now. The ONS is reported as saying the current wage levels are about the same as in 2003. The recent Bank of England inflation report said that inflation was likely to remain above its target of 2% until 2016, suggesting that real wages will continue to fall.

On the bright side, and I'm sure the government see this as a positive, driving wages down ought to help with the unemployment figures in theory. Lower wages means that firms are more likely to take on new staff. Unfortunately with demand stagnant there is no real potential for expansion in the economy as a whole.

These are broad brush-stroke figures. Not the kind of detailed info that professional economic pundits use. That said I do not see a recovery here. I see stagnation. It might be argued that I expect to see stagnation because of the economists who influence my thinking. But if someone else can see a recovery in these figures then I'd be interested to know how.

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Keep is seemly & on-topic. Thanks.