One way of "benchmarking" the current recession is to compare it with an average of the last three - 1974-75, 1979-81 and 1990-91. Based on the analysis below, an average recession path would involve GDP falling by 2-2.5% between Q2 2008 and Q2 2009, moving sideways over the following year and recovering by 2.5% in the year from Q2 2010. This would imply an annual decline in GDP of 1.7% in 2009 followed by growth of just 0.4% in 2010 - significantly weaker than current consensus forecasts of -0.2% and 1.2% respectively (as reported by Consensus Economics Inc).

Economists typically use quarterly GDP data to determine the timing and magnitude of recessions. However, GDP is sometimes distorted by strikes and other disruptions to normal economic activity. For example, GDP peaked in Q2 1973 and fell in each of the subsequent three quarters but much of this weakness reflected industrial action in the coal mining industry, culminating in the three-day week in Q1 1974. The analysis below uses a strike-adjusted measure of GDP, incorporating information on working days lost in industrial action, to calculate the depth of prior recessions. In addition, a judgement is made that the mid 1970s recession began in Q4 1974 rather than Q3 1973.

The first chart overlays the path of strike-adjusted GDP before, during and after the last three recessions on the current cycle. GDP is assumed to have peaked in Q2 2008 and the prior peaks are rebased and aligned to this starting point.

When the mid 1970s recession is dated to start in 1974 rather than 1973, it looks similar in magnitude and duration to the 1990-91 decline. However, the subsequent recovery was much swifter in the 1970s, probably because sterling's membership of the ERM constrained monetary easing in the later episode.

The peak-to-trough fall in GDP was significantly larger in 1979-81 - 6.2% versus 2.8% in 1974-75 and 2.5% in 1990-91. This dismal performance, however, was the mirror-image of much stronger growth in the year before the GDP peak - 5.3% against 0.3% and 1.6% respectively. Relative to its value four quarters before the peak, GDP troughed at similar levels in 1981 and 1991, with a slightly larger decline in 1975.

This last point suggests calculating a benchmark future path by averaging the performance of GDP relative to its level four quarters before the peak across the three cycles, rather than relative to the peak itself. The result is shown in the second chart and is the basis for the description of an average recession path given earlier.

As argued in previous posts, the current recession could be less severe than the last three, because the preceding boom was smaller, interest rates have risen by less and the exchange rate has been unusually weak. Such mitigating factors, however, will be overridden if current financial paralysis persists. Detailed monetary statistics for September to be released next Wednesday will provide further information on the damage to economic prospects from the financial freeze.