Using AI to track sentiment and measure recession risk

Immediate fears of a recession in the UK economy were eased last week with the Office for National Statistics (ONS) latest estimate of monthly GDP. The economy had shrunk in April, but growth was resumed in May.

This has not prevented widespread conjecture that a recession is imminent. The Resolution Foundation claimed last weekend that the risk of a recession is at its highest since 2007, the year immediately before the financial crisis.

The most serious recessions are caused by the debts of the private sector – households and firms – becoming too big. Repayments become challenging, and fears grow amongst lenders that the debt will not be repaid.

At the end of 2007, for example, household debt in the UK was 93 per cent of GDP. Twenty years previously, in 1987, the ratio of debt to GDP was only 49 per cent. This crept up to 57 per cent at the end of 1997. But the opening years of the 21^stcentury saw a surge in debt levels.

The same is true of corporate debt. This was 95 per cent of GDP at the end of 2007, having been only 39 per cent twenty years previously.

Debt remained high at the end of 2018, the latest date for which the Bank for International Settlements data is available. Household debt was 87 per cent of GDP and corporate debt 84 per cent.

But the ratios are lower than they were at the start of the financial crisis of the late 2000s. The trend over the past five years is broadly flat. There is no sign of the rapid accumulation of debt which characterised the 2000s.

The general level of sentiment amongst individuals shows no sign of collapse. With my UCL colleague Rickard Nyman, I have been using AI techniques to measure daily levels of sentiment on social media in the Greater London area since June 2016.

Official forecasts insisted that a sharp recession would take place in the UK in the second half of 2016 if the electorate voted Leave. But the social media- based sentiment measure showed no signs at all of collapse at the time. We could see in real time that it became more positive after the referendum, even in the Remain stronghold of London. And, of course, there was no recession.

Over the past three months, sentiment shows no change on its level in the same period in 2018. Admittedly, the latter was definitely lower than in 2017, a slowdown which ONS data, appearing several months later, confirmed.

None of this means that the economy is roaring away. Growth has been modest. Debt levels are being controlled, but their high levels from a historical perspective means they act as a constraint on spending plans.

Ironically, perhaps the biggest threat of a recession comes the EU, and specifically from Germany. It is much more dependent on manufacturing then the UK, and these exports have been hit by US-China trade tensions. The warnings from economists in Germany are not about a mere recession, but of a potentially severe one.