The recession: a brief history

15 February 2010

The UK economy has finally emerged from one of its deepest economic downturns and the worst since the 1930s, or so official figures released in January suggest.

Preliminary data from the Office for National Statistics (ONS) showed that in the last three months of 2009 the economy expanded by 0.1 per cent, ending six consecutive quarters of contraction. However, the rate of growth was well below the 0.4 per cent anticipated by some analysts.

Having shrunk by 6 per cent over the course of the recession, the economy is now 10 per cent smaller than it would have been had the slump not occurred. Contraction for the whole of 2009 measured 4.8 per cent, the most significant single-year rate of decline registered in eight decades.

Double dip fears

But all the signs are that, although now in recovery, the UK will require time to regain its former momentum. A huge public debt and a lingering reluctance among banks to lend to businesses still weigh heavily around the neck of the economy, and a suspicion lurks in some quarters that the feeble push into positive territory has only been achieved through the support offered by the Bank of England in the form of very low interest rates and £200 billion of quantitative easing.

Were that support to be withdrawn prematurely, many experts are predicting that the recovery may not be just sluggish and fragile but in jeopardy. The UK’s long-term growth trend is 2.5 per cent; given the financial head winds it is continuing to encounter, the economy may grow by just 1 per cent this year. Worse, it could even rebound, slipping back into recession should the private sector prove not to be strong enough to compensate for any slowing down in public spending.

David Kern, chief economist at the British Chambers of Commerce (BCC), warned that the business community faces a long struggle to claw back its losses. He said: “The main aim now must be to ensure that the modest recovery consolidates and slowly gathers momentum. It is critical for both the government and the [Bank of England’s] Monetary Policy Committee to pursue policies that make it possible for business to invest and export. Regulatory burdens must be removed wherever possible, and access to finance improved. A double-dip recession must be avoided at all costs.”

How the recession differed from those in the past

Not only has the recession been virulent, it has also been singular. Unlike many previous economic downturns, the nightmare of 2008 and 2009 was principally fuelled not by government efforts to control inflation but by the near collapse of the banking system, poisoned by toxic debts that were accumulated and bundled into other debt packages during the crisis in the US sub-prime market, and the subsequent drying up of private sector credit. If businesses can’t borrow, then they can’t grow; and if businesses can’t grow, then the economy shrinks.

The history lesson

As well as potent, the recession was both unforeseen and underestimated. In its early stages ­– the beginning of 2008 – few believed that it would be either protracted or harmful. Then the banks began to show extreme distress: Northern Rock survived courtesy of the UK taxpayer. All the while, the broader recession gathered ominous momentum: the second quarter of 2008 in the UK was hit with revised ONS figures of -0.1 per cent GDP growth.

But even then many analysts were still anticipating UK expansion of 2 per cent for 2009, the fundamentals of the economy viewed as essentially sound. Inflation, with oil prices on the up, rather than recession, was preoccupying the thoughts of the world’s economists. In the third quarter of 2008, however, the underlying nature of the global crisis surfaced: Lehman Brothers bank collapsed. Next Fannie Mae and Freddie Mac, the pillars of the US home loan market, were immersed in turmoil. The sand on which the foundations of the pre-recession years were built was further exposed when HBOS and RBS shook and looked as if they might also topple. Share prices fell off a cliff, and business credit became as rare as hen’s teeth. Not just banks but entire countries – Iceland – stared into the abyss of financial meltdown.

Faced with a disaster on a scale potentially the equal of the Great Depression of the 1930s, governments were galvanised into action: nationalisation. The Treasury cut taxes, propped up public spending and (partly) bought up failing banks to dampen the impact of the recession. Billions of taxpayers’ money went into the survival project. Official interest rates were sliced to just 0.5 per cent, their lowest since the Bank of England’s foundation in 1694.

Winter 2008 arrived, and the winds of the recession blew at their coldest. The UK economy contracted by 1.8 per cent in the final three months of the year and by 2.5 per cent in the first three months of 2009. In just one month, the unemployment count rocketed by 137,000.

Come spring, come some faint green shoots. The UK economy, its precipitous fall interrupted by the anti-gravitational efforts of government intervention, continued to decline but at a slower rate. House prices perked up a little. Unemployment levels and business failures were, although extremely painful, less calamitous than those witnessed in the recession of the early 1990s.

So what conclusions can be drawn, if we are indeed emerging, blinking, into the light of recovery? That the economy suffers, as it has done for decades, from a serious imbalance – too much emphasis placed on consumer consumption, encouraged by easily available credit, and too much reliance on our financial institutions to generate wealth – is one. That we must focus on innovative, imaginative enterprise is another. And that we can learn lessons from history at all? That will depend on whether the recovery is based on reform of the system rather than one wedded to the reinstatement of old habits.