Tough Times - A Comparison with Previous Recessions

Recent civil unrest in the UK and other countries have caused many politicians and media pundits to focus on the state of the economy as well as levels of unemployment contributing to a so called lost generation of young people. Many also infer that the current situation may represent a new normal and we can expect to see a decade or more of economic stagnation.

The claims are that the current state of the economy today is so bad that it can be compared to events that transpired in the 1930s and may lead to future significant unrest and turmoil. However, the macro economic variables both in the UK and other western economies do no hold sway to this. To put current economic statistics into perspective we will compare the current situation in the UK with the last recession in the early 1990s as well as other historical periods. We will also look at the UK’s current performance with Germany to gain a perspective on how the UK’s current situation compares with the most successful G8 economy at present.

Unemployment

The biggest single factor in the economy’s current woes is unemployment. However, on a historical basis unemployment is actually relatively low. UK unemployment currently stands at 7.9%. That’s well below US unemployment at 9.1% and not so far above German unemployment at 7% (the lowest since records began in 1991).

On a historical comparison, UK unemployment for most of the 1980s and early 1990s was above 8% despite some major periods of economic expansion. In 1991 unemployment rose to 11%, well above the 8.1% rate it reached in the worst days of 2010.

Many point to high levels of youth unemployment as the major concern. Youth unemployment in the UK is currently running at 21%. While this is troubling, it is well below the 40% level Spain is currently suffering.

However, in 1993 youth unemployment was just as high is it is today. Even during the period of 2001 to 2004 when the UK as a whole had near full employment the rate of youth unemployment was still 11%. High youth unemployment in the early 1990s did not affect a generation of workers from entering the workforce. Nor should it in the future. Young un-trained people will likely always find it difficult to get their first step on the employment ladder. Living at home and having little in the way of financial commitments also means that these workers are not so likely to take less well paid difficult jobs in favour of holding out for something better.

Economic Growth

Sluggish growth in the UK and the rest of the western world has contributed to a feeling that the economy is not moving forward and is not likely to create more jobs in the near term. The UK's growth since the end of the recession in 2009 has been sluggish. On average across 2010 and 2011 economic growth has averaged 1.53% per annum. However, UK long term trend growth is only estimated to be around 2.5% per annum.  We also have to look at these numbers in the context of government budgetary tightening. The UK government is committed to cutting the budget deficit by some 1.5% per annum. This means that the private sector has to create an additional 1.5% per annum growth just to keep the UK figures at zero.

If the current crisis does continue then obviously we will have to draw new conclusions. However, looking at the GDP figures for 2010 - excluding the effects of the bad weather in December of that year - then we can see a relatively similar trend to 1993 when the country emerged from its last recession. There is certainly nothing as yet to suggest the long term growth potential of the economy has been in some way altered or damaged.

Government Debt

Government debt is at its highest level since 1945 and will cripple any recovery. Debt in most western countries as a percentage of GDP is at high levels. However it is not as big a factor as many suggest. Removing the effects of the financial bailout, UK debt to GDP is at 61.4 % (this is looking at the figures excluding the money paid to RBS etc. because the government is likely to recoup these figures by selling its shares over the next few years).

UK debt to GDP topped out at nearly 250% immediately after World War 2. Following the last recession of the 1990s it reached almost 50%. Current projections show the government eradicating the deficit by 2015. Debt to GDP should top out at around 70%.

Obviously these figures appear to show that the current deficit is of historical significance, higher than any time since the end of the Second World War but still nowhere near the level seen in the 1940s. However, measuring debt to GDP tells us very little. We must remember now that the government borrows at historic lows - far below the level seen even in the 1990s. In the 1940s, the government spent 6% of GDP servicing debt. In the 1930s this level was nearly 10%. Even in the 1990s when debt levels were well below 50% the government had to spend 4% of GDP (some two thirds of the NHS’s budget) paying interest. By comparison today even with the high levels of debt of some 80% of GDP (including the cost of the financial bailout) that interest figure is just over 2.5% of GDP.

While the current economic situation for many in the UK is difficult it is by no means incomparable to many previous periods. We have suffered through far worse situations than we currently face. While government debt, slow economic growth and youth unemployment make it difficult for people to feel the improvements, they by no means signal a new normal in future economic trends any more than they did so before. While the current economic statistics may show us entering a new recession they may just as easily show that we simply suffered a short term supply shock caused by the Japanese Tsunami.  A financial crisis kicked off by a Greek default may send us back into recession however this is very unlikely. Unlike the collapse of Lehman Brothers, a Greek default has been well predicted and factored in for more than 2 years. Only time will tell if the current situation is a mid-cycle blip or the end of this business cycle. But even if we do enter another recession the current economic data is by no means historically significant.

 

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