Monday, February 1, 2010

Comparison of Recessions

Graph showing comparisons of Recessions. - A graph showing scale of different recessions in UK

Note in the Great Depression output in UK fell 10% (In US GDP fell by 30% - but UK did not have boom in 20s or 30s - UK unemployment was already high by 1929.)

In terms of GDP fall, the UK recession is the worst since the Great Depression. It is also the longest (6 consecutive quarters). Last quarters growth of 0.1% is so feeble it means it could have easily have been 7 quarters.

Another feature of this great recession was the rapid fall in asset prices in 2008. A fall in asset prices is often an indication of a depression - rather than just recession. This is one reason why so many economists were worried in 2008

Yet, other factors suggest it could have been worse.
Comparing Unemployment, the rise has been relatively modest given output decline.

source: B of E (pdf)
See also: Why is UK unemployment not higher

Also, a positive sign for this recession, is the relative recovery in business and consumer confidence.

source: B of E (pdf)

This upturn in confidence may explain why firms have been keen to retain workers - rather than make redundancies - it may suggest a positive expectation about the medium term.

Housing Recovery

In the 1990s, house prices fell for four years, real house prices (adjusted for inflation) remain below the boom peak for several years until after 1997. So far the housing market has recovered far quicker. Whilst some may state that this is only a temporary recovery, one difference in this recession is that there wasn't the same increase in housing supply. Thus, we do not have to deal with excess housing supply depressing prices (this excess housing supply is a big problem for US, Spain and Ireland)

source: B of E (pdf)
see also: Impact of house prices on consumer spending

Other factors in this recovery is the sharp devaluation of sterling in past two years. As the global economy recovers, the UK should be in a good position to benefit from growth in trade.

This paints a rather rosy picture. But, there is unfortunately more. In particular the hangover of debt - both government, corporate and household. Currently cushioned by low interest rates, as the economy and interest rates recover to normal rates, the record levels of debt will be a factor holding back growth - banks will be reluctant to lend, households will be looking to pay back debt and governments will have to improve fiscal position.


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