Recession in 2008 a Certainty

Oct.20, 2007 in Charts, Economy, Opinion

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If any more proof was needed that the economy is heading downhill fast, the GDP figures for the 3rd quarter, released yesterday, prove it.

The Government’s “headlines friendly” figure, which is only adjusted for their deflator, is disregarded and instead we look at the figures net of RPI inflation.

First, we’ll look at the GDP “Wedge of Doom” chart, first featured back in October 2006 in “Sell Now! Why You Don’t Want to be a Homeowner”. This is the giant wedge formation which had contained the vascillations of GDP growth for over 30 years . . . until the end of 2004 that is.

GDP Wedge of Doom. Predicting a recession in 2008 since 2005

On breaking the bottom support line in 2004, the GDP growth rate kept declining through Q3 of 2005. Bouncing back up in Q1 and Q3 of 2006 GDP growth came up against the underside of the old support (lower green) line and bounced off it. As always, “old support becomes resistance”. The prognosis even then, the economy is going to get sick as GDP will eventually contract.

One chart is never enough. Reducing the time frame to 1993 onwards, we can get further confirmation of what lies ahead with the GDP Channels chart.

Switching GDP Channels. How Q3 2007 GDP predicts a 2008 recession

As you can see above, for 12 years the GDP growth rate moved within a range of about 1.4% to 4.3%. Then in Q3 2005 it broke through the floor, when RPI-adjusted annual GDP growth fell to just below 0.9%.

When it bounced back it peaked at 2.94% in Q3 2006, which provided the upper green (resistance) line for the trend. GDP growth declined again bouncing back to a lower high of 2.57% in Q2 2007 and then falling away again in the third quarter, the one just reported. This confirms the downtrend within the new channel. It also provides the lower highs scenario which is also bearish.

I think the red arrow is a clear enough indication of where the RPI-adjusted GDP growth rate is heading.

What we have are two different charts, each with their own patterns. In both cases, the old established trends were broken a couple of years ago and new trends began. Those new trends have now been confirmed multiple times.

What does this all mean for the future?

A recession based on RPI-adjusted GDP starting in 2008 is a certainty, probably starting Q3 or Q4. However, RPI-adjusted GDP could turn negative as early as Q2 2008.

How long it lasts is another question. Given how dependent the economy is on consumer spending, as opposed to actually making stuff and exporting it, I can see rolling 12-month GDP growth being negative to Q1 2010.

Based on other data, I can see a low of -4% to -6% GDP growth. That is negative 4% to negative 6%. In other words: Contraction. As for the aggregate contraction over all those negative quarters. Best estimate at this time: 9% to 11% of GDP.