Trade Cycle

• What is meant by a recession?

  Negative economic growth over two consecutive quarters.
• What are the characteristics of a recession?

  • two consecutive quarters (6 months) or more of negative economic growth
  • increasing/high unemployment
  • increasing negative output gap and spare production capacity
  • low confidence for firms/households
  • low inflation
  • increase in government expenditure perhaps leadinag to a great budget deficit
• What are the characteristics of the UK Cycle since the early 80s?

  • deep recession in 1980-81

  -> mainly driven by external factors

  • high oil prices (2nd OPEC oil price shock)
  • world economic recession

  -> but domestic factors

  • very high interest rates (to curb inflation)
  • strong exchange rate - “petrocurrency effect” arising from the UK’s huge oil exports
• What are the characteristics of the UK Cycle in the late 1980s?

  An unsustainable expansion

  • huge credit-driven boom
  • housing boom
  • rampant growth of consumption
  • huge trade deficit because of excess demand
  • very large positive output gap leading to accelerating inflation
  • wages followed prices - an increase in inflationary expectations
  • interest rages had to rise to 15% in a bid to control accelerating inflation
• What are the characteristics of the UK Cycle in the early 1990s recession?

  Recession

  • main cause - high interest rates
  • but US recession affected UK exports
  • high UK inflation problem from the Lawson boom - needed controlling
  • uncompetitive UK exchange rate also amplified the recession - partly due to ERM membership
  • housing crash - impact on wealth
  • another deep manufacturing recession
• What are the characteristics of the UK Cycle in the “nice 90s”?

  • a decade of relative stability
  • growth at or around the trend rate
  • sustained expansion in real GDP
  • this hides imbalances - e.g. between manufacturing and services
  • longest period of growth for 40 years
  • good luck?
  • good judgement?
• What are the characteristics of the UK Cycle of the “noughties”?

  • relatively stable growth until the ‘credit crunch‘ in Autumn 2008
• What is a credit crunch?

  A sudden sharp reduction in the availability of money of credit from banks or other lenders.