Industries that had adjusted to the ERM disciplines should now suffer least.
As we approach the end of what has been a hugely disappointing year, with the road to recovery still littered with potholes, it is time to take stock. Which parts of the economy have suffered most and which are relatively well-placed for the eventual upturn?
One central characteristic of the 1990-92 recession has been the apparently widespread nature of the pain. The gloom, it appears, has been liberally spread across all sectors. Unlike 1980-81, service industries are seen to have suffered as much as manufacturing and could have yet tougher times ahead. The south-east of Britain has had a much tougher time than the north.
Some of this appraisal fits all the real facts, particularly that, regionally, this recession has differed from its predecessors. But other elements of the broad brushstroke approach suffer on more detailed examination. If we look at the main sectors of the economy, it is clear that there is a spectrum of misery which runs from construction - its output is down by nearly 15% (and falling) 35e so far - through manufacturing, and then to services. The services sector, despite the gloomy image, has escaped lightly to date. Its output is down by only 2.5% compared with pre-recession levels. The sharpest fall has been in distribution, hotels and catering - down 4.6% - while transport and communications is only 2.3% off its pre-recession peak.
So why the squeals from the services sector? Any fall in demand is unwelcome, but when it is set against expectations of continued sharp rises it comes as the coldest of cold showers. Retail sales were growing at 5% to 6% a year in the late 1980s. The rush for new retail space reached fever-pitch.
During the recession retail sales have stagnated rather than fallen sharply, but the effect, when set against exaggerated expectations of continued strong growth, has been dramatic. Much the same can be said for financial and business services.
There have also been big differences in the experience of the various component parts of manufacturing industry. Simon Briscoe, economist at Midland Montagu, points out that different sectors of manufacturing have fared in a far from uniform way during the past few years.
The output of the textiles industry, for example, has fallen to just 82% of its pre-recession peak (reached as long ago as 1987), metals output is down by 17% and engineering by 11%. The chemicals sector however has suffered a drop of only 2%, while the food, drink and tobacco sector has broadly maintained its output.
What does all this tell us about the nature of the recession and the likely outlook? With the exception of the construction industry, which has been operating in the harshest domestic climate since the '30s - although it enjoyed the biggest boom in the late '80s - a common thread here is that misery has been greatest in those industries which are most exposed to foreign competition.
There is good reason for this. Export and import-competing sectors were in the front line of the economy's adjustment to the disciplines of ERM membership, and to the unhelpful rise of sterling against the dollar which accompanied the second year of membership.
Manufacturers, with the exception of such industries as food, drink and tobacco, are particularly vulnerable to harsh exchange rate regimes. In most of the theoretical simulations of ERM membership, these would be the first to respond to the new regime. But for service industries, the disciplines are slower to feed through. Hairdressers, for example, operate in a part of the economy which is not internationally traded - if a haircut in London is expensive, one does not travel to Paris to have one instead.
Regionally, according to business and economic forecasters Business Strategies Ltd, the West Midlands will be the main beneficiary of September's forced shift in policy. BSL says that a 10% sterling fall, combined with a reduction in UK base rates to 8%, will boost GDP in the region by 1.7% in 1993, compared with a national boost of 1.1%.
The North and Yorkshire and Humberside, both up 1.4%, are also big beneficiaries, as is the North West, up 1.3%. Significantly, the smallest boost is to the South East, where manufacturing plays a relatively smaller role in the regional economy, and where the GDP boost is just 0.8%. The shift in policy will, therefore, reinforce the regional shift that has been occurring at present, closing the North-South gap further.
But those models assumed that, eventually, even non-traded goods sectors would adjust, mainly through the mechanism of lower growth in incomes. The key thing was that it would take longer.
September's ERM shake-up has, however, changed the balance. Those sectors of industry which had adjusted to disciplines of a DM2.95 central parity for sterling, stand to gain from the lower exchange rate and the Government's increased freedom to reduce interest rates. Meanwhile, domestically-orientated sectors, both service industries and construction, will benefit from lower interest rates. Manufacturing, in recession, will gain in two ways and should experience the best of what is still likely to be a rather anaemic upturn.
This is not true, of course, for parts of manufacturing where the recession merely accelerated a long-standing relative decline, and where prospects continue to be poor. The past few years have left us with an economy that is badly out of balance. Restoring balanced growth could take a long time.