Readers Question. In 1980, what was the economy’s biggest risk–inflation or unemployment?
In the UK, the 1980s was a period of economic volatility.
At the start of 1980, the biggest problem facing the UK (and other countries) was cost push inflation. In the late 1970s, UK inflation reached over 20%. This was caused by:
- Rising oil prices
- Wage push inflation
The UK government aggressively tackled inflation. To tackle inflation, the government
- Increased interest rates
- Reduced Budget deficit through higher taxes and spending cuts
- Pursued monetarist policy of trying to control the money supply.
However, this tightening of fiscal and monetary policy (combined with high value of Pound Sterling)
UK Unemployment in 1980s
But, in doing so caused the severe recession of 1981. Unemployment shot up to 3 million and high unemployment persisted throughout the 1980s.
This was one of great failures of the 1980s – the end of the post war period of full employment. High rates of unemployment precipitated riots in inner cities during the summer months of 1981.
See: UK economy 1979-1984
Economic Growth and Lawson Boom
After recovering from 1981 recession, the UK experienced a long period of economic expansion. Towards the end of the 1980s, the growth rate reached record post-war levels (over 2% quarterly growth – equivalent to 8% 12 month growth).
The government believed there had been a ‘supply side miracle’. But, this growth rate caused inflation and a bigger current account deficit.
By the late 1980s, the UK entered the ERM in a bid to keep inflation low, but this was insufficient and at the end of the boom, inflation in the UK had once again reached double figures.
(note: figures show quarterly growth rates – *4 to get 12 month growth)
This boom was followed by another recession. The recession of 1991 was caused by:
- The sharp rise in interest rates
- Economy over-extended by the boom years, e.g. consumer debt levels had grown and then were heavily affected by higher interest rates.
- Sharp reversal in consumer and business confidence after the exuberance of the boom years evaporated.
- See more details at: Lawson Boom
UK house prices
Nominal house prices almost tripled in a decade. The increase was even greater in the south east and London. The housing boom was caused by:
- Growth of real incomes for higher earners
- Encouragement of a ‘home-owning democracy’
- Council tenants given right to buy
- Growth in number of households exceeding growth in supply.
- Growth in mortgage industry with banking deregulation enabling more mortgages to be made available.
However, house price growth was very volatile, and after the boom of the late 1980s, house prices crashed in 1990-92 – due to higher interest rates and recession of 1991-92.
UK industrial output was hit hard by recession of 1981, but showed good recovery in later part of the 1980s. The 1991 recession hit consumer spending as much as industrial output.
The 1980s also saw the decline of traditional heavy industries like coal, steel and ship-building. (See: Decline of the coal industry)
UK current account in 1980s
UK current account since 1980.
In 1980, the recession and decline in consumer spending led to a surplus. However, by the late 1980s, the UK current account had grown to a deficit of over 4% of GDP. This reflected:
- Strong growth in consumer spending and growth in imports.
- Decline in savings ratio and unbalanced economy geared towards consumer spending.
- Relative decline in the competitiveness of manufacturing / export sector
- UK attracting more capital flows due to London’s prominence as financial sector. These capital flows help to finance a growing deficit.
Related periods of economic history
- 1960s – The ‘You’ve never had it so good era’ starts to unwind.
- 1970s – The Era of Discontent. Strikes, 3 day weeks, inflation, boom and bust. The 70s had everything except stability
- Late 1980s – The Lawson Boom. Rapid growth, inflation and recession.
- 1990s – Recession and then the great stability
- The economics of the 2000s
- The great moderation – period of economic growth between 1992 and 2007