Eurozone mired in recession pause

CEPR CEPR Business Cycle Dating Committee

The simplest business cycle dating algorithm declares recessions over after two consecutive quarters of positive GDP growth. By that metric, the Eurozone recession has been over since 2013Q1. This column argues that growth and improvements in the labour market have been so anaemic that it is too early to call the end of the Eurozone recession. Indeed, if this is what an expansion looks like, then the state of the Eurozone economy might be even worse than economists feared.

The CEPR Business Cycle Dating Committee met on 11 June 2014 to determine whether the Eurozone is out of the recession that started after 2011Q3. The duty of the Committee – comprised of Philippe Weil (Chair), Domenico Giannone, Refet Gürkaynak, Monika Merz, Richard Portes, Lucrezia Reichlin, Albrecht Ritschl, Barbara Rossi, and Karl Whelan – is to date peaks and troughs of the Eurozone business cycle, marking recessions and expansions – a role similar to that of the NBER Business Cycle Dating Committee in the US.

The Committee decided that there is not yet enough evidence to call a business cycle trough. Thus, in two successive meetings, the committee refrained from declaring the end of the recession while recognising that the data are not showing further deterioration. The details can be found the Committee’s website here.

As simple as possible, but not simpler

Why do people try to date business cycle troughs and peaks? In general, labelling periods as recessions and expansions is useful because thinking in dichotomies makes the world simpler. There are good times and bad times. When in bad times, we can look back and see what we did last time when things were bad, and whether it worked.

The simplest dating algorithm is the one used by journalists – two consecutive quarters of negative GDP growth signal the beginning of a recession, and two consecutive quarters of positive growth signal its end. By that metric, the Eurozone has been in expansion since 2013Q1. But this ‘expansion’ does not look and feel like an expansion, and many argue that the recession that began after 2008Q1 has in fact continued unabated. Although the two-quarter business cycle dating algorithm has the appeal of simplicity, it is too simple.

Eurozone business cycles after the 2008 crisis

Let us look more closely at the period since 2008Q1. The Committee dated an expansion between 2009Q2 and 2011Q3. At the time, output and employment were growing strongly, suggesting that this was indeed an expansion period. However, the economy started from such a low base that, although things were getting better, it still felt like a recession. In the event, the expansion came to an end before GDP reached its previous 2008Q1 peak.

Figure 1 Eurozone GDP, 1995Q1–2014Q1

The judgement of the Committee is that, although the Eurozone’s GDP has not been shrinking since 2013Q1, the growth rate and the improvement in the labour market have been so anaemic that if output were to start contracting in the next few quarters this would not constitute a separate, triple-dip recession but rather the resumption – after a brief ‘recession pause’ – of the second post-financial crisis recession that began after 2011Q3. If the current weak recovery endures, 2013Q1 might well end up being labelled a business cycle trough. This would not be good news, as this is not the kind of expansion anyone wishes for. Economic times in the Eurozone are bad. They are bad if we are still in a recession, but they might be worse than we feared if this is what expansion looks like in the Eurozone.

Do labels matter?

Times of low output and employment would be painful whatever we chose to call them. So what is in a name? The recession designation matters because calls for policy interventions are stronger in recessions, making large interventions politically more palatable. It is too early to call the end of the recession in the Eurozone.