{"id":207766,"date":"2024-02-24T05:34:57","date_gmt":"2024-02-24T05:34:57","guid":{"rendered":"https:\/\/michigandigitalnews.com\/index.php\/2024\/02\/24\/the-uk-in-recession-expected-or-unexpected\/"},"modified":"2025-06-25T17:21:39","modified_gmt":"2025-06-25T17:21:39","slug":"the-uk-in-recession-expected-or-unexpected","status":"publish","type":"post","link":"https:\/\/michigandigitalnews.com\/index.php\/2024\/02\/24\/the-uk-in-recession-expected-or-unexpected\/","title":{"rendered":"The UK in Recession? Expected or Unexpected?"},"content":{"rendered":"

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With two quarters of GDP decline in the UK<\/a> according to the current vintage of data, it’s reasonable to ask if the UK is in recession. ONS discusses the limitations of using the two-quarter rule of thumb here<\/a>. Figure 2 of this study<\/a> illustrates the dangers of relying upon the two-quarter rule when the GDP data are subject to revision. See additional discussion using the “technical” definition, AP<\/a>, CNN<\/a>, Bloomberg<\/a>. It’s also of interest to consider whether statistical methods relying on financial indicators would have predicted a recession, variously defined.<\/p>\n

<\/span><\/p>\n

Here’s a picture of GDP, monthly GDP, and industrial production ex-construction:<\/p>\n

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Figure 1:<\/strong> Real GDP (blue bar, left log scale), monthly real GDP (black line, right log scale), industrial production ex-construction (red, right log scale). Source: ONS. A hypothesized peak-to-trough 2023M06-2023M12 recession shaded light blue.<\/em><\/p>\n

I mark the end of the recession at 2023M12 since I have no additional data past that time, and BoE Governor Bailey argues the recession might already be over<\/a>.<\/p>\n

As a counterpoint, NIESR<\/a> observes:<\/p>\n

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\u2026the state of the UK economy is better described by the fact that GDP fell between the first quarter of 2022 and the final quarter of 2023.<\/p>\n<\/blockquote>\n

So perhaps the recession is 2022Q2 to 2023Q4, peak-to-trough.<\/p>\n

Would we have predicted either of these recessions (if indeed one or the other is a recession)? I compare an estimate from a simple 10yr-3mo spread plus short rate (blue line), against a foreign term spread plus debt service ratio (tan line), the latter suggested by Chinn-Ferrara (2024)<\/a>.<\/p>\n

The answer is likely no (for a 1985-2022 sample), unless a very low threshold was used.<\/p>\n

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FIgure 2:<\/strong> Estimated probabilities from probit model on spread and short rate (blue line), and on foreign spread, debt service ratio (tan line). ECRI defined peak-to-trough recession dates shaded lilac. Hypothesized 2023M06-M12 recession shaded light blue. Source: author’s calculations and ECRI.<\/em><\/p>\n

While a debt-service model based regression specification has a much higher pseudo-R2 (0.38), the implied recession probabilities are quite low for 2023. Interestingly, the spread plus short rate has a very low pseudo-R2 (0.08), but accords a much higher probability of recession — although well short of 50%. This is in contrast with research which indicates the spread is a good predictor of recessions (Mills, Capehart and Goodhart, 2019<\/a>), although their sample was much longer than the one I used.<\/p>\n

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[ad_1] With two quarters of GDP decline in the UK according to the current vintage of data, it’s reasonable to ask if the UK is<\/p>\n","protected":false},"author":1,"featured_media":207767,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[155],"tags":[],"_links":{"self":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts\/207766"}],"collection":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/comments?post=207766"}],"version-history":[{"count":2,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts\/207766\/revisions"}],"predecessor-version":[{"id":342588,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts\/207766\/revisions\/342588"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/media\/207767"}],"wp:attachment":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/media?parent=207766"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/categories?post=207766"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/tags?post=207766"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}