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29 January 2011

How likely is a double-dip recession?

A quarter of negative growth is common but there hasn’t been a double dip since 1957.

By George Eaton

This week’s terrible growth figures have prompted renewed debate about the possibility of a double-dip recession. One way to gauge the likelihood of a double dip is to look at how frequently they have occurred in the past.

The graph below from Policy Exchange shows that it’s not unusual for a period of post-recession growth to be followed by a quarter of contraction. For the purposes of their briefing, Policy Exchange defined such an event as a “double dip” (the technical definition is two successive quarters of negative growth).

Based on this definition, there were double-dip recessions in 1957 (GDP contracted in Q2 after two quarters of growth) 1958 (GDP contracted in Q2 after two quarters of growth, 1962 (GDP contracted in Q4 after three quarters of growth), 1974 (GDP contracted in Q4 after two quarters of growth) and 1976 (GDP contracted in Q2 after two quarters of growth) and in 1992 (GDP contracted in Q2 after two quarters of growth).

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Indeed, as Policy Exchange’s Andrew Lilico notes, the only recession not to be followed by a “double dip” was in 1980, on the basis that the initial period of contraction saw two quarters of negative growth (1979 Q1 and 1979 Q3) interrupted by a quarter of growth (1979 Q2). Thus, the first dip did not meet the standard definition of a recession (two successive quarters of contraction).

The last time that an official double dip took place was back in 1957 when GDP contracted in Q2 and Q3 after two quarters of growth. That will be of some comfort to George Osborne, although he would do well to prepare a defence strategy. He won’t be able to blame the snow next time.