According to the NBER (2012), the last recession ended in June of 2009. CEPR (2012) dates the end of the recession in the Eurozone in the same quarter. For the UK, there is no established chronology but a visual inspection of Figure 1 shows that the recession and the subsequent recovery in the three economies have been highly synchronised.
Also evident is the deceleration of the recovery in mid-2010 – just as the European sovereign crisis was gathering momentum. After a year or so of similarly faltering recoveries, however, the fourth quarter of 2011 seems to mark the point at which the path of the US diverged from that of the Eurozone and the UK. Since then the UK, although with very volatile readings, seems to have gone back into recession while growth in the Eurozone went negative in the fourth quarter of 2011.
Figure 1. Growth rate of real GDP
While we still don’t have an official number for the first quarter of 2012 for Eurozone GDP, the preliminary numbers for the US and the UK were published last week. The UK, with an annualised quarter-on-quarter growth rate estimated at -0.80%, is now officially back in recession (the official, annualised, figure for growth in Q4 2011 was -1.21%). US GDP, on the other hand, had an estimated growth rate of +2.22% (annualised) for Q1 2012, which confirms the recovery although it signals a slowdown from the revised quarter on quarter growth rate of 2.99% (annualised) for Q4 2011.
New independent estimates
Our estimates (Now-Casting Economics 2012) challenge the official view. They are computed automatically (without judgmental input) by a model which is based on many variables including both hard data, such as industrial production and employment, and soft data – ie, surveys, which provide timely indications of the current state of the economy. Now-Casting estimates are shown in Figure 1 above as dotted lines. These clearly suggest that:
- the recovery in the US is more robust than official figures indicate;
- the Eurozone has lost its grip on the coattails of the US recovery; and
- the UK is escaping the threat of a double dip – contrary to the official estimates.
So should we trust the official figures, or does the now-casting approach give a better view?
Let’s start with the reliability of the official estimates. In the UK, revisions of official GDP figures are notoriously large (see, for example, Garratt and Vahey 2006 and Faust et al 2005). To understand how large these revisions can be, look at the example of Q3 2009.
- The preliminary estimate, made on 23 October of that year, was that UK growth was -0.40% in Q3.
- At the second estimate, made a month later, the figure was revised upwards to -0.30%.
We wrote an article on Vox, published on 23 November 2009, under the title “Is the UK economy still in recession? We don’t think so” (Giannone et al 2009), in which we estimated that Q3 growth in 2009 was +0.15%.
The UK Office of National Statistics (ONS) made a number of substantial revisions to their numbers two years later – in August 2011 – and the official figure is now +0.23%. Figure 2 illustrates this fact. As Faust et al (2005) have shown, revisions of this magnitude are not uncommon in all major economies.
Figure 2. UK GDP Growth in Q3 2009 – path of revisions
Turning back to our evaluation of the current state of the UK, US, and Eurozone economies, let us consider how stable the Now-Casting estimates are in relation to the inclusion of progressively more recent information. Figure 3 shows the now-cast since the beginning of July 2011, for the rolling forward quarter for each of these three economies. Rolling quarters are three-month periods with constantly changing start and end dates, so the rolling forward quarter is always the three-month period that starts today. Hence the now-cast for the rolling forward quarter – which we calculate every day – is a weighted average of the now-casts for the current and next calendar quarters.
Figure 3. Now-casting GDP growth rates – rolling forward quarter
Note: Where the graphs cross the vertical lines (eg, 1st July) the plot point for the rolling quarter equals the now-cast for the calendar quarter (eg, Q3 2011).
It seems that the stock market is aligned with our view. Stock market indices for the three markets – US, UK and Eurozone, follow a path which is similar to the now-casting rolling forward quarter illustrated in Figure 3.
Figure 4. Stock market indices since 1 June
Going back to Figure 3, we can also detect greater volatility in the Eurozone now-casts by contrast with the US, where the now-cast has been stable since the start of this year. In other words there have been fewer surprises in the US, which confirms the impression given by the official US GDP numbers – that while the pace of growth in the US may be moderating slightly, it still has good momentum.
Our analysis shows that this volatility is mainly apparent in relation to the second quarter (the current quarter). The evolution of the now-casts for this quarter is shown in Figure 5. It is worth noting that hard data have provided relatively consistent and optimistic signals while surveys, after an optimistic message at the beginning of the year, have pulled the now-cast down.
Figure 5. Evolving now-cast of Eurozone GDP growth – Q2 2012
Surveys are notoriously noisy but our work has shown empirically that they provide in general a timely indication of where the real economy is going (see Angelini et al 2011 and Giannone et al 2008, 2009b). The recent fact that hard data and surveys give conflicting signals may reflect real uncertainty among consumers and businesses. This is interesting in its own right and may point not only to the vulnerability of the Eurozone economy at this juncture, but actually to the likelihood that this will come to be seen as a turning point when the Eurozone and the US really did part company.
Angelini, Elena, Gonzalo Camba-Mendez, Domenico Giannone, Lucrezia Reichlin and Gerhard Rünstler (2011), “Short-term forecasts of Euro Area GDP growth”, Econometrics Journal, 14(1).
Banbura, Marta, Domenico Giannone, and Lucrezia Reichlin (2011), “Nowcasting”, in Michael Clements and David Hendry (eds.), Oxford Handbook on Economic Forecasting, Oxford University Press.
CEPR (2012). “Euro Area Business Cycle Dating Committee”.
Faust, Jon, John Rogers, Jonathan Wright (2005), “News and noise in G7 GDP announcements”, Journal of Money, Credit and Banking, 37(3).
Garratt, Anthony and Shaun Vahey (2006), “UK real-time macro data characteristics”, Economic Journal, 116:509.
Giannone, Domenico, Lucrezia Reichlin, and David Small (2008), “Nowcasting: the real-time informational content of macroeconomic data”, Journal of Monetary Economics, 55(4).
Giannone, Domenico, Lucrezia Reichlin, Saverio Simonelli (2009a), “Is the UK still in recession? We don’t think so”, VoxEU.org, 23 November.
Giannone, Domenico, Lucrezia Reichlin, and Saverio Simonelli (2009b), “Nowcasting Eurozone economic activity in real-time: the role of confidence indicators”, National Insititute Economic Review.
NBER (2012). “US Business Cycle Expansions and Contractions”.
Now-Casting (2012). “Now-Casting... Economics in real time”.