Determination of the Q2 trough in economic activity Harald Uhlig 04 October Identifying recessions is crucial to guiding policymaking. It reports that the trough in economic activity occurred in the second quarter of , marking the end of the recession that began in the first quarter of The recession lasted 6 quarters and the total decline in output from peak to trough was 5.
April marked a clear trough in industrial production, following the peak in January A The Eurozone has been it hard and in many ways by the Global crisis. Its banks were left in a mess Blundell-Wignall and Slovik , Greece faced a still haunting debt crisis and rumours of Eurozone break-up were taken seriously Blejer and Levy-Yeyati The policy response to these various challenges required, and still requires, a proper identification of the business cycle. Indeed, identifying recessions is crucial to guide policymaking, such as the timing of fiscal expansion and budget cuts Corsetti and Reinhart and Rogoff , and especially in uncertain times when news can unchain massive shocks.
In CEPR established a Business Cycle Dating Committee for the Eurozone to establish the chronology of the Eurozone business cycle, by identifying the recessions and expansions since This time the Committee determined that a trough in economic activity occurred in the second quarter of The trough marks the end of the recession that began in the first quarter of The month of the trough is April , indicated by a clear trough in industrial production, following the peak in January The recession lasted 5 quarters, or 15 months, and the total decline in output from peak to trough was 5.
How to identify a Eurozone recession? A recession is a significant decline in the level of economic activity, spread across the economy of the Eurozone, usually visible in two or more consecutive quarters of negative growth in GDP, employment and other measures of aggregate economic activity for the Eurozone as a whole; and reflecting similar developments in most countries.
A recession ends when growth resumes in GDP and other key measures of economic activity for the Eurozone as a whole; and when this reflects similar developments in most countries. Because a recession is a broad contraction of the economy, not confined to one sector, the Committee emphasises economy-wide measures of economic activity.
The Committee believes that domestic production and employment are the primary conceptual measures of economic activity, also taking into account industrial production as a monthly measure of private production, sales as a measure of retail activity, investment, and consumption, as well as data on unemployment.
Employment and unemployment tend to lag economic activity at the end of recessions: The committee does not forecast, however, whether unemployment rates will eventually return to their pre-recession level, or to some other level. The quarter of the trough According to the definition of a recession provided above, the key variables for determining the trough are Eurozone GDP and GDP in the member countries. Eurozone GDP bottomed out in the second quarter of see figure 1 , and has grown every quarter since then, in currently available data.
Given the initial uncertainty concerning the recovery as well as concerns regarding the impact of the Greek debt crisis, the Committee felt it prudent to wait for the data release on GDP in September to ascertain that the recession did indeed end in Q2. Employment has stabilised but has not turned yet see figure 1 , while unemployment has continued to rise, albeit at a slower pace. This is not unusual at the end of recessions, and therefore is not in contradiction to our assessment.
Germany and France bottomed in the first rather than the second quarter of , but the GDP difference is mild. Italy bottomed in the second quarter of The GDP of Spain kept falling until the fourth quarter of , but the further decline was fairly mild. The same picture emerges for most of the smaller countries, with the majority reaching the trough in Q2 and a few more with a bottom in Q1.
There are a few exceptions and caveats. GDP in Greece has continued to decline. Ireland and Cyprus reached the bottom in Q4. The Committee has also examined investment and consumption for the Eurozone.
Investment in the form of gross fixed capital formation has kept dropping, until the most recent quarter, while private consumption has grown somewhat less then GDP since Q2 figure 2. Decomposing the nominal growth in output from Q2 until Q2 shows that private consumption accounted for about half, inventory investment for about a third and government consumption for about a quarter, while the contribution of investment in the form of gross fixed capital formation was negligible and the contribution of trade slightly negative.
In short, the recovery of GDP seems to be largely accounted for by private consumption, inventory investment and government consumption. Eurozone GDP, investment and consumption percentage change vs Q2 The month of the trough A similar picture is painted by monthly data.
In particular, industrial production, as a monthly indicator of economic activity, had a marked trough in April Figure 3. Sales show nearly equally deep troughs in March , May and September , and therefore provides a somewhat erratic picture figure 4. As raw sales data contain a large seasonal component, one cannot read too much into these somewhat jagged movements of the de-seasonalised data, however.
Eurozone industrial production percentage change vs Q2 Figure 4. Eurozone sales percentage change vs Q2 What about unemployment?
Unemployment keeps rising figure 5. However, this is not unusual at the end of recessions. Therefore, given the clear trough of industrial production in April , the Committee has decided to declare this month to be the end of the recession. Eurozone unemployment rate References.