When did the Great Recession start?

If you put this question to most economists at the tail end of 2008, they would have said “around the time Lehman Brothers collapsed”. The last Inflation Report of the year showed things flat in Q2, and then that first bad quarter in 15 years in 2008Q3.  However, the latest data from the ONS suggests it got far worse far earlier.   08 in real time   Around the beginning of the 2008 the economy started contracting, reaching  a pace of 1% per year by Q”. That is a fierce recession, even without all that language about “breaking the buck”, and the extraordinary spike in credit spreads (they were merely “elevated”). What were the MPC thinking in early 2008? Here is the fan chart of where they thought things were in February that year – when the economy was flatlining, and about to start shrinking really quickly: BOE Feb 08 That’s how they thought the world looked – set for a mild slowdown. And how did they act (kudos to the Bank for how it publishes data, by the way)?MPC Votes 08 A rather mild response?  Put it this way: imagine what we would be demanding of Carney, right now, if the economy was slowing at a pace of 0.7% per quarter.  Blithely, the May 08 minutes report that the financial markets expect rates to be around where they are:

“Expectations of policy rates, derived from financial markets, in the United Kingdom, United States and euro area had increased during the month. Expectations of Bank Rate twelve months ahead had fallen back early in April, but had then increased later in the month. That left forward rates implying a little under half a  percentage point reduction in Bank Rate during the next twelve months. “

This is then followed by this gem

Several factors appeared to have contributed to the rise in interest rate expectations. Some  market contacts had put it down to news on the outlook for demand being less weak than expected,  especially in the United States. Another plausible explanation for the increase in rate expectations  internationally was the further rise in oil prices and a growing appreciation of central banks’ determination to control inflation

Central banks control inflation, determinedly, by keeping nominal spending at such a level that inflation cannot get out of control.  In the middle of 2008, financial markets were impressed by the central banks’ determination to do just that. The minutes go on to observe that the various surveys pointed to output growth slowing. Not a contraction, just a bit less growth. And the minutes have time to record two pieces of influence on the CPI that the MPC can do nothing about: the way something from 12 months before was about to drop out (“The effect of last year’s cuts in retail gas and electricity tariffs”) and some upcoming rises in energy prices.  Note that these were discussed in terms of how they would boost CPI, and maybe influence those dangerous inflation expectations, which various surveys said could be unhelpful (i.e. high).  That these cost shocks damage real incomes don’t get talked about much.

It would be unfair to see these minutes as evidence of disastrous thinking: the MPC can indeed see a slowdown of sorts.  But they are balanced,  and the Committee continuously reasserts the need to convince the public of its anti-inflationary determination. This was a decisive reason not to cut rates.  Only Blanchflower saw absolutely no risk to easing.

What is disturbing is that the Eight were right and Blachflower wrong – in terms of the remit they had.  Given the CPI-at-2% remit, you needed to see serious risks of CPI going well below 2% in order to argue for easing. Blanchflower was being a hero, but a hero in another cause – the secondary one of stopping the UK economy from imploding.


FlipChartRick and Chris Dillow each have interesting posts on how the economy was in difficulties/not exactly partying long before we were treated to the sight of Lehman employees carting their stuff out of the office. In my crude terminology, they look at real rather than nominal things: the existence of working poor, of higher numbers of self employed people, an inability to produce good jobs, alongside longer term technological/secular stagnation arguments in the background.  I think a longer examination of 2008 might produce a more straightforward analysis.  We had a monetary framework that forced at least 8 intelligent people, during a quarter of sharp contraction, to argue for some merit in keeping nominal interest rates some 5% higher than the rate of nominal growth. No wonder household incomes started collapsing around then (chart to follow):

Tim Harford has an excellent column on how macro economists can’t get it right.  Forecasts are difficult, and some of this story has to be about why neither the MPC nor the markets was screaming Fire! at a time when the economy was falling hard.  But a whole lot of blame for what appears to be a structural drop in household prosperity has to be aimed at a monetary policy remit that actually encouraged the MPC to be “balanced” at such a time.

Published by freethinkingeconomist

I'm a mid 40s, former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

6 thoughts on “When did the Great Recession start?

  1. The most important thing is that, with the possible exception of a few months, there was no world recession. There was and still is flatlining in the Luddite ruled western countries but that is all. Which proves what happened and who caused it.

  2. Great to have you back blogging. Did it also make a difference if the Bank had known the economy was growing at an annualised pace of what looks like 5% in 2H 2007? Another question, which sounds very silly – is there anything in the statistical construction of GDP that means a very bad quarter X+1 can actually reduce GDP in quarter X?

    1. Two great questions to which I don’t have an immediate answer. The first in particular: if the Bank had felt we were seriously above capacity, and that a significant chunk of the CPI inflation was genuine demand-side overheating, then it may well have strengthened the hand of the hawks. Given that first ever letter from MK to AD about busting 3%, you could quite easily have seen them keen to reassert credibility.

      (I remember myself in my early days as a think tanker believing it was interesting to break down CPI so you can say what a family like X or Y *really* suffers in terms of inflation. That sort of stuff, repeated in the Mail, gained real traction).

      I am told that learning how GDP stats are put together is vital, and also a horrifying experience. I suppose inventories can cause some snapback – I believe that may be what is happening with the US Q1 figures this year? But that is the opposite of what you mean. Otherwise, I would think it is not so much the statistical construction as the way production generates incomes generates demand for next quarter’s production and so on….

      1. Thanks for the reply. The oil price is an interesting component of what was happening back then, I remember Andrew Oswald saying that recession would follow the oil price hike, and it did, but no-one believes that was the main cause.

        In GDP you make some good points. I suppose what I was trying to think of would be something like seasonal adjustment, where you don’t fully know what was real and what was seasonal until you have months or years more data, and so next period’s data release actually affects the last period. As i said probably not the case but I was wondering whether it is in fact impossible to know accurate currently GDP.

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