The U.K. Economy in Perspective

On this page we present the salient features of the U.K. Economy since the onset of the Great Recession in historical perspective, where the comparison is with the prior business cycles that we identify in the U.K. We have access to longer time series for the U.K. and we are able to identify four cycles.

The first figure below shows the path of Real GDP and the estimated trend component (see the page on Identifying European Business Cycles) which is the basis for our analysis.

The Great Recession hit the U.K. Economy very hard and highlighted the significant fiscal problems facing the U.K. economy. The U.K. was also a focal point of the financial crisis and its banking system was badly undermined. The following graph plots the percentage change in Real GDP for the U.K. over the post 1970 business cycles and underscores how weak and prolonged this recovery has been. The more recent data raise the possibility that the U.K. is sinking back into recession.

Looking at the recoveries from the trough shows much the same message.

Consumption in the U.K. began to recover after six quarters but has since faltered and is now threatening to decline again. Capital formation did not decline as much as in the 1980 recession, but it recovered only weakly and has now gone into decline again. Residential capital formation has not recovered.

U.K. exports have recovered about as well as in previous cycles. Imports have been slow to respond.

The Role of Government

The U.K. entered the Great Recession with a large stock of outstanding debt, a position that was exacerbated by the fact that it was one of the centers of the financial crisis. The U.K. embraced an austerity program early on. The figure below shows the response as measured by the percentage change in government consumption from the peak of the cycle to the present. This essentially captures the level of Government spending. The final figure shows the change in government spending as a percent of GDP. Because GDP declined sharply this increased sharply at the beginning of the downturn.

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