Current UK stagnation may have many causes, but one we know about is the UK media. Plus why the UK definition of a recession is no longer fit for purpose.

In the UK the
definition of recession used
by most people is two successive quarters of falling
GDP. This definition always involved a knife edge problem. If GDP
fell by 0.1% in two successive quarters we were officially in
recession, but if output fell by 1% in one quarter and grew by 0.1%
in the next there was no official recession. If a recession is meant
to indicate periods in which output growth is particularly poor, then
in this example it fails. The knife edge problems also means that
mild recessions can easily disappear after data revisions.

A second problem has
only become significant since immigration flows have been large and
variable. The UK’s definition of a recession refers to GDP rather
than GDP per capita (total output per head of population). GDP per
head is much the more relevant number for most people, because it is
a better indication of average personal prosperity. So the definition
of recession should really relate to GDP per head. As the chart below
shows, on that basis we have had two recessions since the end of the
pandemic recovery.

A much more relevant
way of putting it is that GDP per capita has still not recovered its
pre-pandemic position.

The third and most
important reason why our current definition of recession is not fit
for purpose is that it only makes sense when underlying growth is
significantly positive. Since WWII but before the financial crisis,
when UK GDP per capita grew on average by over 2%, a recession
indicated a lack of demand in the economy. The way to get out of
recession (inflation permitting) was to boost demand by cutting
interest rates or with a fiscal stimulus (tax cuts or increases in
government spending). The pandemic was different of course, but it
was so different there was little risk of confusion.

In contrast, the
recessions since 2022 have had nothing to do with deficient demand in
the economy. We know that because the Bank of England started raising
interest rates over that period to stop a rise in domestically
generated inflation. The labour market remained tight over this
period, with unemployment at historic lows by recent standards. The
economy wasn’t growing because of a lack of demand, but because the
supply of goods was not increasing.

The reason for this
can be seen in the following chart.

Labour productivity
(here measured by output per hour) has remained close to the level
achieved just before the pandemic, so GDP per head has failed to rise
above pre-pandemic levels. [1] For more detail on this and some of
the measurement issues involved, see
Chris Giles here.

This ‘supply side’
stagnation is very different from the recessions of the early 80s,
early 90s or late 2010s. Because of the latter, most people think of
a recession as a short-lived demand side problem, whereas what we are
seeing today is supply stagnation that has lasted nearly five years.
The problems and their solutions are very different. Either we need
to start referring to what used to be the normal type of recession as
‘demand deficient recessions’, or we need an alternative
definition of a recession. [2]

Why has UK
productivity growth been so poor since the pandemic? As we don’t
have a good handle on the causes of productivity growth at the best
of times, any answer is speculative. However, looking at other
countries may be helpful. The UK is not alone in seeing stagnant
productivity over this period. The situation in Japan, France and
Germany is just as bad or worse. The major economy that seems to have
done best by far over this period is the US.

US policy during the
pandemic stands out from major European countries in two ways. First,
the US did not have a furlough scheme financed by the government. As
a result, unemployment rose much more during the pandemic, but that
might have allowed efficiency gains that otherwise would have been
more difficult. Second, the US gave a substantial boost to the
economic recovery from the pandemic through a large fiscal stimulus.

In all countries
investment fell substantially in 2020 as the pandemic hit. This lost
investment would have depleted the capital stock, and also reduced
the scope for innovations to be embodied in new equipment. It would
be surprising if this large drop in investment didn’t have negative
consequences for future productivity growth. It is also true that
investment in the US during the pandemic stood up better than
elsewhere, but the correlation between investment growth over the
pandemic period and subsequent productivity growth is not perfect:
investment in Sweden and France remained strong but their
productivity growth has been weaker than in the US. It could also be
the case that poor performance in some European countries is due to
domestic issues rather than any common cause.

We know with some
degree of certainty that this is true for the UK. Brexit reduces
output permanently (eventually by a total of 4% according to the OBR)
by reducing labour productivity. So part of the current stagnation in
UK output and productivity is highly likely to be a consequence of
Brexit. The chart below, of UK business investment compared to other major economies, comes from the FT here. 

Yet a decline in output of the order of
magnitude estimated by the OBR was predicted by all the independent economists in this
field who looked at this before the referendum, so it is hardly a
surprise that it has come to pass. Did voters just ignore these
warnings?

Not really. Most of
the print media effectively ignored them, and pushed Brexit with as
much propaganda as they could. The broadcast media ‘balanced’ the
expert advice with counter claims from the tiny number of economists
that wanted to push Brexit, giving the
impression to all but the most savvy voters that expert opinion was
divided. I have little doubt that with a media more committed to
telling the truth Brexit would never have happened.

As I have said
before, politicians find it hard to increase growth but can quite
easily reduce it, and Brexit is a clear example of that. That is
particularly true if the media actively promotes politicians likely
to damage growth. That happened with Brexit, but the media
environment has not significantly changed since then. If anything,
right wing newspapers have become even more extreme, and the BBC
still promotes ‘balance’ over knowledge.

Opinion polls today
show the consequences of that. Reform, the party led and entirely
controlled by Nigel Farage, is often ahead of the Conservatives and
sometimes ahead of Labour. Farage made his name leading another party
whose chief purpose was to advocate for Brexit. With Johnson out of
the picture, Farage is effectively Mr. Brexit in the UK right now. So
why is a politician who advocated for such a disastrous policy doing
so well?

One response is to
say voters are stupid, but that is not my view. The print media that
gave us Brexit still fill their pages with propaganda designed to
promote Farage and like-minded politicians, and will of course never
admit how they lied to achieve Brexit. In the broadcast media, every
interview with Farage should start and end by asking him why he made
such a huge mistake in championing Brexit, and how can voters trust
someone with such poor judgement. [3] After all, if any other
politician had cost the average voter 4% of their income this would
be the media’s approach. But it hardly ever happens with Farage.

Explaining the
continuing popularity of Farage as ‘just about immigration’
hardly absolves the UK media. They as much as politicians are ultimately responsible for concealing basic truths about
immigration from voters. The right wing press remorselessly pushes
anti-immigration propaganda, and the broadcast media hardly ever asks
about the cost of reducing immigration, or why refugees are forced to
cross the channel in small boats. It never asks why most voters want
lower immigration but at the same time want more overseas workers for
most occupations.

Which is why I think
it is possible for Farage to top some opinion polls despite being
responsible for a large part of current UK stagnation and poor UK
living standards.

[1] There are two
stories behind why GDP per capita has fared slightly worse than
productivity. The first reflects a decline in the measured level
participation in the workforce since the pandemic, an issue I and
others have talked about before [ref]. The second is that the measure
of the workforce is too low because people have stopped answering the
labour force survey since the pandemic, so the productivity series is
too high (see here,
section 3, for an alternative series.)

[2] An alternative
would be to measure GDP per capita relative to some trend. That makes
more sense to me for demand deficient recessions anyway, because then
recessions would only be over once GDP per capita had regained its
trend level. We would avoid the nonsense of journalists describing
0.1% growth after a large fall in output as the economy coming ‘out
of recession’.

[3] Farage’s claim
that the ‘opportunity of Brexit has been mismanaged by the
Conservatives’ should be torn apart. The Brexit he campaigned for
has
set up barriers to trading with the EU, which is the
ultimate reason why output is lower.