Andrew Roberts, the research chief for European economics and rates at RBS, says the chance of an imminent recession is currently 75%.
He bases this on an estimate by Larry Summers, which states that the lower unemployment gets, the more likely it is that a recession is around the corner.
On the one hand, that’s merely a truism: The economy moves in cycles, and what goes up (employment) must eventually come down.
But here is the statistical basis, per Roberts:
Whether you believe in the framework of Secular Stagnation or not, Larry Summer’s empirical observation about the life expectancy of mature economic expansion should worry you. In this speech at the Central Bank of Chile he highlights that when an expansion is more than five years old and unemployment is below 6%, the probability of a recession within three years is over 75%. Unemployment hit 6% in the US 15 months ago.
This is Summers’ chart:
The obvious problem is that these are US numbers, and Roberts was making the case for Europe. (His argument is that if a collapse in China occurs at the same time that US economic growth falters, then we’re all screwed.) So we went looking for some UK data that might show the same thing.
Unemployment claims, as tracked by ONS:
Unemployment rate vs. GDP growth, from EconomicsHelp.org, based on ONS data:
Not quite as dramatic as the Summers chart but still: When unemployment gets really low, the UK does seem to plunge into a recession.
UK unemployment is currently … 5.2%.
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