- The recession came after the late 1980s economic boom; this was a period of high economic growth and rising inflation as the government allowed the economy to expand significantly higher than it's long-run trend growth rate because they felt there had been a "supply side miracle". They argued that the supply-side policies enabled the economy to grow at a faster rate than previous.
- During the 80s, the government kept interest rates low and cut income tax, particularly for high earners, which helped increase consumer spending. The boom in the housing market was due to overbuilding, and so increased house prices led to a subsequent increase in consumer wealth, spending and confidence.
- Unfortunately, this proved ultimately over-optimistic as most of the economic growth was caused by consumer borrowing and spending, which reflected in a large current account deficit and growing inflation.
- Overall, the UK Recession period from 1990 to 1991 was believed to have been caused by the primary factors of high interest rates, falling house prices due to overbuilding in the 80s, and an overvalued exchange rate. Other causes include restrictive monetary policies enacted by central banks mainly in response to inflation concerns, the loss of consumer and business confidence due to the oil price shock, and a decrease in defence spenditure in conclusion with the Cold War, though this was more relevant to America.
- A significant wave of rioting at the recession's culmination point in 1991; social discontent and unemployment were seen as major factors. The areas affected were isolated communities devastated by poverty and unemployment, separated from urban centres.
- To reduce and control this high inflation, the government joined the Exchange Rate Mechanism. However, as the UK joined, the economy began to slow down, making it soon become difficult to keep the value of the Pound at its exchange rate target . To maintain the value of Sterling, the government had to use its foreign currency reserves to buy Pounds and increase interest rates. But, investors correctly predicted that these interest rates were unsustainable; the high interest rates made mortgage payments very expensive, and many home owners saw a fall in disposable income, leading to a subsequent lower spending.
- Despite these measures to prop up the Pounds, the speculators were stronger than the government, and so John Major's Conservative government was forced to leave the Exchange Rate Mechanism after Black Wednesday.
- High interest rates in 1991 to 1992 caused a rise in borrowing costs, and a rise in mortgage interest payments, subsequently reducing consumer disposable income. It also caused a fall in house prices as many people couldn't afford their mortgage payments, causing house prices to fall by 10% as home repossession rates continued to increase.
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