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 as the government sought to control the inflation it had caused.
See Lawson Boom
- Interestingly, the Chancellor of the exchequer Norman Lamont, said later words to the effect that the ‘unemployment was a price worth paying to tackle inflation’
UK house prices
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.
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 Manufacturing in 1980
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.