A third of the world’s economy will enter recession this year, Kristalina Georgieva said last Sunday. That is not a nice message from the director of the International Monetary Fund for the first day of the new year. 2023 will therefore be ‘more difficult’ than last year, she said. Half of the countries of the European Union are already going through a recession this year.
Does the Netherlands belong there? Strictly speaking, we’re almost there. The conventional 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) already reported, the economy contracted by 0.2 percent. It is possible that this contraction will also occur in the fourth quarter. If so, the ‘recession’ is technically a fact. That will be announced on February 14.
But there is something to be said about the definition. A contraction that small is easily within the margins of error of the statistics. Statistics Netherlands continues to adjust its figures on gross domestic product for a long time, and only a year and a half after the end of a calendar year will there be a definitive version of the ‘national accounts’. In this case, that is the summer of 2024. In the meantime, all kinds of adjustments can be made afterwards, because data is always received that is more reliable.
If the margins between growth and contraction are small, it may turn out that a recession has taken place afterwards, where it did not seem so at first. Or the other way around: a recession was signaled that later turned out not to exist. It happened at the beginning of this century, when there was minimal growth or contraction for consecutive quarters. Subsequent adjustments at the time led to the previously predicted recession of 2001, for example, not happening.
We are unlikely to get rid of the common definition of ‘recession’ in Europe any time soon. In the United States they do it differently. There, the recession is determined by the National Bureau of Economic Research (NBER), an independent organization where a group of economists is charged with that task, among other things. Officially, the NBER does not have that task: the agency does not belong to the government. But everyone, including the central bank, respects their judgment.
Records in 1879
The NBER judgment is qualitative, not quantitative – as with GDP growth rates. The Bureau identifies a U.S. economic peak and subsequent trough, and determines how many months the downturn (recession) lasts between them. There is a nice historical overview, since 1854. The record holder is the recession that started in 1879 and lasted 65 months, more than five years. This is followed by the recession which, not unexpectedly, started in the third quarter of 1929 (the Wall Street crash) and dragged on for 43 months, until the first quarter of 1933.
The NBER maintains a Business Cycle Dating Committee for this task, which is based on a subjective weighting of various economic variables. The most important are industrial production, real (inflation-adjusted) incomes, real retail sales, and two measures of employment. This focus on work is part of a long American tradition. For example, unlike in Europe, for example, the central bank not only has the task of keeping inflation in check, but also of striving for the fullest possible employment.
How would a fictional Dutch NBER rate our economy right now? In October last year, industrial production grew by 3.6 percent. That is a significant plus, although that growth is declining rapidly. The figures for November will be published next week. There are hardly any current figures on income development. But if the high inflation-adjusted increase in hourly wages is taken, there is a contraction of 6 percent.
Tax measures can soften that effect somewhat, but then there will most likely be another significant contraction. The fact that household consumption is not (yet) shrinking may be due to the fact that considerable savings were made ‘during Covid’, so that there are buffers to maintain spending.
ING economists calculated that households have built up an additional 100 billion euros in bank balances since the start of the pandemic, which they can now address. Yet, despite those buffers, real retail sales are already falling sharply. They shrank by 3.3 percent in November.
Labor market is still doing well
So incomes and spending are contributing to the idea of a recession, but the industry is still doing reasonably well. On the other hand, the labor market is an important factor for the NBER’s recession spotters. And it is still doing well in the Netherlands. According to figures from Statistics Netherlands, the employed labor force increased by 3 percent on an annual basis in November, and even by 0.4 percent compared to the previous month. Labor participation continues to rise. And since a peak of 3.8 percent in the summer, unemployment has fallen again to 3.6 percent.
In summary: pressure on incomes, spending that stagnates or decreases. But production that is still rising and a labor market that is good, even tight, for the time being. Americans would wait a while before they declare a recession in the Netherlands. What is needed, in the words of the NBER, is a “significant decline in economic activity, spread across the economy and lasting more than a few months.”
Can still come, of course. But according to the American method it does not seem that far yet.
A version of this article also appeared in the January 6, 2023 issue