What is GDP and what is a recession?
What is GDP and what is a recession?
What is Gross Domestic Product (GDP)?
Gross Domestic Product, commonly referred to as GDP, is the total value of all the goods and services produced within a country, over a period of time; typically annually, quarterly or monthly. GDP figures are released for most of the world’s economies and are a useful measure of how successful a country’s economy is.
In individual terms, GDP is similar to understanding a person’s annual earnings as it offers you a quick indicator of how economically active someone is.
GDP is calculated by adding up all consumption (both private and public), government spending, investments and the net value of any exports minus imports. The balance of imports vs exports is of particular interest.
A trade surplus is when a nation exports more than it imports and GDP often increases.
A trade deficit is when a nation imports more than it exports and GDP often decreases.
GDP can be expressed in different ways, depending on whether one wishes to include inflation or not. Nominal GDP is the actual number resulting from a GDP calculation, whereas real GDP takes into account inflation and is the preferred measure as it enables accurate comparison.
As an example, if the UK’s GDP was £400 billion one year and £440 billion the next – the nominal figures suggest an increase in economic activity of 10%. However, if inflation was running at 10% over the same period, the real economic activity actually remains unchanged.
There is also Purchasing Power Parity (PPP) which is an adjustment to a nation’s GDP figure that enables easy comparison against other nations. PPP is expressed in dollars and takes into account the local cost of living and prices.
To put GDP in an even greater context, a figure of GDP per capita is often quoted, which is simply the GDP, divided by the population, to indicate how productive a nation’s citizens are. For example, is a nation producing more with a stable population or is the population growing but productivity is falling? Note that GDP per capita can also be expressed as nominal, real or PPP.
What is a recession?
A recession is when a nation suffers from a significant reduction in economic activity over an extended period of time. A ‘significant reduction in economic activity’ is defined as a reduction in Gross Domestic Product (GDP) and an ‘extended period of time’ is typically defined as two or more successive quarters.
As a result, a recession is where there is a decline in GDP for two or more successive quarters.
When has the UK been in a recession?
A recession is nothing new to the UK and one of the earliest recorded recessions was the ‘Great Slump’ of the mid-1400s, which lasted in the region of 60 years.
Since then, there have been numerous recessions, ranging from the ‘The Great Frost’ of 1709 which stemmed from a failure of the UK harvest; to several instances of recession caused by wars in America over the 1800s. Perhaps the most famous recession is ‘The Great Depression’ of the early 1930s, where demand for exports from the USA dropped off and the UK ended up coming off the gold standard.
In more recent memory, there have been recessions in the 1950s and 1960s, the oil crisis caused a recession in the mid-1970s and the move from a manufacturing economy to a service economy caused another recession in the early 1980s. The early 1990s suffered from a recession caused by an increase in interest rates, inflation and the UK trying to maintain membership of the European Exchange Rate Mechanism; and the global financial crisis (GFC) of the late 2000s led to what’s been called ‘The Great Recession’ and was the UK’s deepest recession since WW2. The most recent recession in the UK was the Covid-19 recession of 2020 in response to the first lockdowns and the company shutdowns that followed.
Over the past century, it’s clear that recession hits the UK economy every decade or so and is usually in response to significant shocks to the status quo.
How is the length of recession measured?
The period of a recession is typically measured from the peak of expansion before the contraction, to the lowest point of the downturn before the next phase of expansion begins.
Is the UK currently in a recession?
The quickest way to understand if the UK is in recession or not is to look up the latest GDP figures on the UK Government’s ONS website and if you find two or more quarters of a decline in GDP, the UK is likely to be in recession.
Conclusion.
The media can be very quick to chase headlines around the doom and gloom of a recession, however, the UK has seen numerous recessions in the past and they don’t typically last very long. The UK has a long-standing upward trend of growth and particularly when there are periods of a change in the way things are done, unforeseen global events or advances in technology there may well be a correction. The key takeaway is to know that recessions happen, they are just a part of the way that economies work and that if you follow the trends, there will be a return to economic growth.
What’s next?
If you need help or advice on your personal or business finances or if you want to consider investing to make your money work harder, you can get in touch with one of our advisors for independent financial advice. We offer a free initial consultation and although we are based in Tunbridge Wells, we advise clients across the UK.
Don’t forget, this article offers general financial information and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.