If 1981 to 1988 represented, in economic terms, the seven fat years, is the UK now due to suffer seven lean years? asks David Smith.
What goes up must come down, and in economics vice versa. The laws of economics, while never as soundly based as those of the natural sciences, do tell us one thing with reasonable certainty: the recession will not last for ever. Just as the boom of the late 1980s was followed by the 1990-91 recession, so the current downturn will lead, eventually, to recovery. But when will this be?
To answer this we need to begin with a bit of recent history. As most people are well aware, two recessions - in 1974-75 and in 1980-81 - stand out in modern times. Business confidence and gross domestic product (GDP) slumped significantly in both periods.
Now, we all know that those recessions were bad, but how long did they last? There are two ways of measuring the length of a recession. The first is to simply add up the number of consecutive quarters of falling GDP or, as economists say, negative growth. The second approach is to see how long the economy took to move from the peak of economic activity to the subsequent trough.
In the 1974-75 recession GDP declined for four quarters, and in 1980-81 five. The current recession formally began in the middle of 1990 (although many businesses would pinpoint an earlier date). Thus four quarters of declining GDP will have been clocked up by June this year, and five quarters by September. If previous experience is a guide then, on this measure, the recession will be over before the end of the year.
This is even more likely if we look at the peak-to-trough recession measure. In 1974-75 this lasted eight quarters, in 1980-81 nine. In the current recession the last peak in economic activity was as long ago as the first quarter of 1988. By the end of 1990, therefore, the recession had already lasted 11 quarters. By June it will be 13, and by September 14. This, by any reckoning, is a long, drawn-out affair, which should be coming to an end fairly soon. But will it?
This, clearly, is the $64,000 question. Is there anything about the present recession which renders it special, in the sense that it is likely to last much longer than its predecessors? Let us look at the possibilities.
The first comes from the fact that this downturn was preceded by a very long upturn. Apart from a small hiccup in 1985, the period 1981-88 represented, in economic terms, seven fat years. Remember when Nigel Lawson claimed to have abolished the business cycle? To persist with the Biblical analogy, what if the seven fat years are to be followed by seven lean years? In other words, alarming as it sounds, is it possible that the recession could last until the mid-1990s?
Probably not, or at least let us hope not, but there are other reasons why this recession may not follow historical precedent. An economy in recession needs all the help that it can get. The route out of the 1974-75 and 1980-81 recessions was made much easier by a falling exchange rate, which provided an important element of export-led growth. This time, within the European exchange rate mechanism (ERM), that route is largely closed off. The pound can still fall against the dollar and other non-ERM currencies but not, apparently, within Europe.
And the ERM constraint could operate in another way. Previously, once the inflation danger had passed, governments cut interest rates rapidly. We have yet to see how things work out within the ERM but a repeat of, say, 1981-82, when interest rates virtually halved in 12 months, looks unlikely.