Is Coronavirus Causing A Recession Or A Depression?

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A point being made by Danny Blanchflower:

There is no doubt about it: the UK and many other European countries are already in a depression. We think of a depression as even worse than a recession – as a sustained, long-term downturn in economic activity in one or more economies. A depression is generally deeper and longer lasting than a recession.

Well, yes and no, yes and no.

There are different ways of deciding what is a depression and what is a recession. And the official one for a recession is two successive quarters of falling GDP. And weird – foolish even – as it may sound we’re not sure that this we’re having here would even qualify as a recession.

Note that definition again. Two successive quarters of falling GDP. No, not two successive quarters where GDP is below the previous peak, but the second quarter has to have, again, a smaller economy that the first, which is itself below that peak.

And is the coronavirus going to cause that? We don’t know, we’re uncertain – that is, we truly don’t know. We can gain an intimation by looking at China which is a few weeks to a couple of months ahead of us in this cycle. And it’s not obvious that China is going to have a recession.

Yep, activity fell over in February. But the economy – judging by the PMIs that Blanchflower himself is using – grew again from that low base in March. The expectation is that much to near all of the country will be back up and operating in this month, April.

At which point it’s not obvious that China is going to have two successive quarters of falls in GDP. I’d put good money on GDP being lower at the end of 6 months than it was at the start of Covid-19 but that’s not a recession by our usual definition.

Weird but there it is. And I can see the same as being true of the UK, US and so on. Yep, horrendous falls in GDP. Wouldn’t surprise to see 20 to 25% off in just the one monthly figure.

Which brings us to the idea of a depression. The definition here is usually a 20% fall in GDP. I think we’re going to get to that. I don’t think we needed to, I think the lockdown – nope, not an epidemiologist, not even an economist, it’s just personal opinion – is too extreme and the loss of the economy is doing more damage than the disease, but, you know, so what, we’ve all got arseholes just as we do opinions.

But we’ve only the one modern experience of a depression. Because we do at least try to distinguish between things that happen as a result of cycles in the economy and things that happen because someone comes and destroys the economy. Venezuela and Zimbabwe are not referred to as depressions. They’re the destruction of an economy through bad economic policy. After all, we can’t use the one same word, depression, to describe a temporary fall in the standard of living and the permanent killing of the standard of living through idiot socialism now, can we?

But note something about our definition of depression. It doesn’t mean that it’s longer than a recession. And at that point we need to make the difference between endogenous and exogenous causes – of either recession or depression.

Imagine that we’ve got some build up of some imbalance in our economy. As Keynes said in 1930, say we were introducing new technology (then, the move from steam to electric power, the mechanisation of agriculture) faster than we were working out what to do with the now surplus labour. We’ve got to work out what to do and that’s difficult, new knowledge always is. It takes some time.

On the other hand we could have an economy that was fine. Full employment, at least a bit of growth, the new technologies (now at least) aren’t killing jobs and so on. Then we’ve an external factor, a pandemic, that comes in and lays waste. OK, but that’s easier. For once the external factor, that exogenous one, goes away again then we already know what to do because we were doing it.

Sure, lots of pain and grief but we’ve not actually got to work out what to do. We’ve just got to get back to doing it, a lesser problem.

All of this is subject to to more than a little uncertainty of course. Prediction, especially about the future, is a difficult thing. But we are in a very odd situation. Wouldn’t surprise me at all that we’re in a depression, a fall of 20% or more in GDP. In fact, it would surprise me if we’re not. On the other hand, it would surprise me if we were in a recession, that two consecutive quarters of falling GDP. The lurgy is, and therefore the lockdown is, going to last a couple of months at most. At which point growth will resume from whatever lower level we perch at when we reopen that economy.

Yep, weird, but there’s my prediction. We’re in a depression but not a recession.

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Quentin Vole
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Quentin Vole

Would this be the same ‘Danny’ Blanchflower who called out Neil Ferguson as ‘just an historian, not a health expert’ on Twitter?

Mr Womby
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Mr Womby

Didn’t he captain Tottenham Hotspur in the 60’s?

Quentin Vole
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Quentin Vole

For those of us of a certain age, the name Blanchflower has to be prefixed by ‘Danny’ (not the real name of the great footballer, either).

Michael van der Riet
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Michael van der Riet

Most problems in life can be solved by arguing about my definition being righter than your definition. It’s an undeniable fact that the words you use make all the difference. Niceties matter! It’s not a devastating economic blow, people, it’s only a correction.