Sunday, 13 September 2009

Is the Definition of a Recovery a False Economy‏?

Recently a number of major economies have come out of recession (France, Germany and Japan). This lend me to think about the definition of coming out of a recession.

It seemed odd that 2 quarters of economic decline is required for a recession and only one month’s economic increase required to pullout of a recession. To me this seems wrong; surely you would need to have 3 months of GDP expanding to actually pull out of recession.

I agree that technically the recession is over if for one month a country pulled out of one, however if the economy took a downturn again say in the next month does this mean we have to wait 3 months to declare a recession again?

Imagine the scenario of an economy which is in recession with these movements in the GDP per month using the same unit of measurement (see graph) expanding the odd month but also with more periods of contraction. We all know that this is an economic decline as that's the trend but this scenario would not be called a recession at the time just stagnation perhaps. In hindsight people may look back and call this period a recession but not when they are in the moment, the government would say look we are out of recession when really it’s not the case.

Naturally in real life we tend to go through an economic cycle of growth and decline etc so I admit that the above scenario is unlikely, but it is possible a close example of this is Japans lost decade. Perhaps we should really have economic recovery redefined as 2 quarters of economic growth?

An economist looking at the situation would say that 'we are coming out of recession' but a politician who is in power would say 'We are out of recession'. I think economists should point out to politicians that just because an economy does not shrink it dose not mean that the economy is now out of a recession. Watch and see over the next few months when these claims are made.

I would like to note that I have a diploma in economics.


  1. I've heard of two steps forward and one step back still making progress, but this seems to equate 6 steps back with one step forward!However to be fair, it only means that there has been a first hint of an economic recovery, which may just indicate that it seem to be bottoming out and we are starting to come out of a recession.It just goes to show that words can mean different things to different people.In truth, common sense says to me, as an engineer and not an economist, that we aren't really out of this recession until we recover all the ground that we have lost!So, can we ever recover from it, when we have lost 100's of £billions by bailing out the banks and by quantative easing?Dont we need unimaginably rapid and phenominal economic growth to do that, or at least higher growth then we have ever experienced before and for a very long time to do that?

  2. Thanks Bill,

    Well as an accountant and a student of the economy. I cant see fast growth for a very long time with such a massive debt and the expected spending cuts. Although a slow growth would be a good thing in the long run. I also see other climate change problems effecting growth in the next 20 years or so.