February 8, 2023

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How do you define recession?  In America they see it differently than in the Netherlands

How do you define recession? In America they see it differently than in the Netherlands

A third of the global economy will enter recession this year. Kristalina Georgieva said last Sunday. It’s not good news from the director of the International Monetary Fund for the first day of the new year. So 2023 will be tougher than last year, he said. Half of the European Union is already in recession this year.

Does the Netherlands belong there? To be fair, we’re almost there. The usual definition of an economic recession is a contraction in gross domestic product (GDP) from the previous quarter, and then for two quarters in a row. In the third quarter of 2022, the Central Bureau of Statistics (CBS) has already announced, the economy shrank by 0.2 percent. This contraction is likely to occur in the fourth quarter as well. So, ‘recession’ is technically a reality. It will be announced on February 14.

But there is something to be said for definition. A summary that is as small as possible within the margin of error of the statistics. Statistics Netherlands has been adjusting its figures for GDP for a long time, and the definitive version of the ‘national accounts’ is only available one and a half years after the end of a calendar year. In this case, it is the summer of 2024. Meanwhile, all kinds of adjustments can be made later, because the data is always obtained more reliably.

If the margin between growth and contraction is narrow, where it did not appear so at first, a recession later occurred. Or the other way around: a recession was signaled, which later turned out not to be. This happened at the beginning of this century, when there was minimal growth or contraction for consecutive quarters. A subsequent adjustment during that time led to the previously predicted recession of 2001, for example, not happening.

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It is unlikely that we will soon get rid of the common definition of ‘recession’ in Europe. In America they do it differently. There, recessions are determined by the National Bureau of Economic Research (NBER), an independent body charged with that task among economists. Officially, the NBER does not have that mission: the agency is not owned by the government. But everyone, including the central bank, respects their judgement.

Records in 1879

The NBER judgment is qualitative, not quantitative, like GDP growth rates. The bureau identifies a U.S. economic peak followed by a trough and determines how many months of decline (recession) last between them. There is a good historical overview from 1854 onwards. The record-setting depression began in 1879 and lasted more than 65 months and five years. This was followed, unexpectedly, by a 43-month period beginning in the third quarter of 1929 (the Wall Street Crash) and stretching back to the first quarter of 1933.

The NBER maintains a business cycle dating panel for this task, which is based on subjective weighting of various economic variables. The most important are two measures of industrial production, real (inflation-adjusted) income, real retail sales, and employment. Focusing on work is part of a long American tradition. For example, unlike in Europe, the central bank is tasked with not only keeping inflation under control, but also striving for as full employment as possible.

How would a hypothetical Dutch NBER rate our economy now? Industrial production grew by 3.6 percent in October last year. That’s a significant plus, though that growth is slowing fast. Figures for November will be released next week. There are no current figures on income growth. But if hourly wage increases are taken out to adjust for higher inflation, there is a 6 percent contraction.

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Tax measures may soften that effect somewhat, but then there will be another significant contraction. The fact that household consumption has not contracted (yet) may be due to substantial savings made during the ‘Covid era’, so there are buffers to maintain spending.

ING economists calculated that households An additional €100 billion has built up in bank balances since the pandemic began, they can now address. However, despite those buffers, real retail sales are already falling sharply. They were down 3.3 percent in November.

The labor market is still good

So income and expenses contribute to the idea of ​​recession, but the industry is still doing reasonably well. On the other hand, the labor market is the key factor in the NBER’s recession finding. And it’s doing even better in the Netherlands. According to statistics from Statistics Netherlands, the number of employed workers increased by 3 percent year-on-year in November, and also by 0.4 percent compared to the previous month. Labor force participation continues to rise. Unemployment fell again to 3.6 percent from a peak of 3.8 percent in the summer.

In short: pressure on income, stagnant or declining spending. But still rising productivity and a good, tight labor market for now. The Americans will wait a little longer before declaring a recession in the Netherlands. What is required, in the words of the NBER, is “a significant decline in economic activity, widespread throughout the economy and lasting more than a few months.”

More to come, of course. But it still doesn’t seem far-fetched in American terms.