August 26

Recession? What’s a recession?

This month, the eurozone has emerged from recession. But what does that actually mean? Is it the end of the downturn? Or does it just mean things are looking a bit brighter? And if so, by how much?

Since the financial crisis began, investment terminology has increasingly moved from the pink pages to the front pages. But there’s no need to be intimidated. To help you navigate through the headlines, here are some commonly confused economic terms:

Recession vs downturn
A recession is usually measured by a country’s gross domestic product (GDP). If GDP growth is negative for two consecutive quarters, then that country is deemed to be in recession. Easy! A downturn, on the other hand, is a catch-all term for any fall in economic activity. It doesn’t depend on any official statistics, and could be anything from a decline in manufacturing output to a dip in an index.

Deficit vs debt
This is an easy one to get confused by: politicians mix them up all the time in official announcements. A deficit is the annual shortfall between cash coming in and cash going out, so the UK’s deficit is the amount by which its expenditure exceeds the money brought in by its revenues. The opposite of a deficit is a surplus. However, UK debt is the total amount that the UK owes. The deficit or surplus adds to or subtracts from this figure each year.

Fiscal vs monetary
Fiscal policy relates to a government’s powers to tax and spend, whereas monetary policy is about controlling the supply of money. The most common mechanism of monetary policy is the use of interest rates, but more complex tools have become commonplace recently, particularly the much-misunderstood quantitative easing (QE). QE involves governments injecting capital into institutions by buying huge quantities of government bonds. In theory, this encourages lending and liquidity, stimulating the supply of money. So if someone tries to tell you it’s about physically printing money, be sure to let know them it isn’t.

Basis points
Then there’s the dreaded basis point, which is 1/100th of one percentage point. So if you hear a commentator talk about a “20 basis point rise in GDP”, what they really mean is the number grew from, say, 0.4% to 0.6% (which is also a 50% rise).

OK, now you’ve got the basics. And remember: as with all jargon, even the experts can get muddled over the basics now and then. So don’t let these abstruse lexemes (sorry: words) baffle you. Don’t have nightmares.

Duncan Black, 26 August 2013