The UK’s stop-start recovery has been the weakest to follow any recession in the past 100 years, with output still 4% below the level of 2008.
Great Depression – 1930s
The devastating downturn of the early 1930s followed Winston Churchill’s decision as chancellor, in 1925, to hitch the UK economy to the gold standard at an impossibly uncompetitive exchange rate. That left British industry vulnerable to the slump in worldwide demand that followed the great Wall Street crash of 1929, and the downturn that followed culminated in widespread industrial unrest.
It was only under duress and in the depths of a financial crisis in late 1931 that Ramsay MacDonald’s national government was forced to relinquish the gold standard. But the result was an immediate 25% devaluation of sterling against the dollar, which helped to give exporters a powerful boost and sowed the seeds of recovery. By 1934, economic output, which had slumped by almost 8% in 18 months, had returned to pre-crisis levels – though arguably it took the intense demands of equipping Britain for a world war to bring about a full economic recovery.
Oil shock – 1973
When a powerful cabal of oil-producing Middle Eastern states slapped an embargo on the west in late 1973, in protest at America’s backing for Israel in the Yom Kippur war, it created a classic example of what economists call an “external shock”.
Oil prices trebled, and consumers and businesses in the gas-guzzling west were hit by a wave of inflation, sending many, including the UK, into recession as demand collapsed.
Output declined by more than 3% in little more than a year, against the background of the three-day week, imposed on industry by the Heath government to preserve power during a miners’ strike. The recovery turned out to be W-shaped, as GDP bounced back strongly, but then fell again in 1975. It took three and a half years after the onset of the crisis for GDP to return to its pre-recession level, helped by the discovery of the UK’s own oil reserves in the North Sea.
Margaret Thatcher took power in May 1979 against a background of rampant inflation, widespread strikes and deep recession. Economic output continued to fall throughout the next two years, and unemployment rocketed, as the Conservative government battled to impose the prime minister’s radical new vision of monetarism and supply-side economic reform.
The economy returned to modest growth in 1981, but it took another two years before the output lost in the downturn had been recovered. Meanwhile, unemployment continued to rise until 1986, peaking above 3 million – though fortunately for the Conservative government, Britain’s triumph in the Falklands conflict created a welcome distraction from economic woes at home in the run-up to the 1983 general election.
The downturn of the early 1990s saw many homeowners caught up in negative equity or forced into repossession after the so-called “Lawson boom” of the late 1980s turned to bust. Exporters were also struggling with an uncompetitive exchange rate after John Major persuaded Thatcher to enter Europe’s Exchange Rate Mechanism, tying the pound to the mighty deutschmark, in a move that Major and his colleagues hoped would help control inflation.
The economic fightback began with Black Wednesday in September 1992, when the Treasury finally admitted that it couldn’t beat the financial markets, and the pound dropped out of the ERM. Eurosceptic Norman Lamont later confessed to having sung in the bath afterwards.
Leaving the euro helped to bring about a sharp devaluation, making industry more competitive and allowing interest rates to come down. It still took three years from the onset of recession for the economy to return to pre-recession levels of output.
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