How the UK’s current recession compares to the 2008 financial crisis

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The UK has technically entered a recession after the economy contracted by 0.3 per cent in the last quarter of 2023 following a fall of 0.1 per cent in the three months prior.

Two successive quarters of negative economic growth is the commonly used benchmark for a recession. This is the sixth recession the UK has experienced since the start of the 1970s, with the most recent occurring during the Covid pandemic.

But how does the current downturn – and its consequences – compare to those before?

2023 recession expected to be shorter

Three of the five recessions the UK experienced between 1970 and 2020 lasted for over a year and saw five consecutive three month periods where economic growth was negative.

In 2008 to 2009, for example, growth was negative for 15 months – a time when the economy was ravaged by the fallout from the global financial crisis.

The economy shrank by more than six per cent between the first quarter of 2008 and the second quarter of 2009, and took five years to return to the size it was before the recession started. 

The only shorter recessions were in 2020 and 1973. The 2020 downturn was caused by the Covid lockdown and was far, far more dramatic, seeing an overall fall in economic growth of over 22 per cent. The economy contracted 10.4 per cent across the full year, according to revised official data, the deepest on record since the Great Freeze of 1709. However, it lasted just two quarters (six months).

Meanwhile, the 1973 recession saw the UK economy contract in three quarters, before recovering to positive growth briefly, and then going back into recession in 1975.

This was caused by a fourfold increase in oil prices which added to Britain’s existing inflation problems, peaking at over 20 per cent.

However, as the graph below shows, Capital Economics forecasts that in the the first three months of 2024, economic growth will be down by 0.1 per cent, followed by two quarters of 0.2 per cent growth, meaning this will be the shallowest recession of the six, and also one of the shortest.

The path of the UK’s recent recessions from the first quarter onwards, with projections for this year from Capital Economics. The 2020 recession is not included for scale reasons.

Ashley Webb, an economist at Capital Economics explained: “The good news is that any recession will be tiny and may already be nearing an end. We think the economy will recover over the coming quarters as the drag from high inflation and high interest rates fades and fiscal policy becomes less restrictive.”

There is bad news though. This current recession comes amid a period of very low growth for the UK.

Between 1947 and 1973, the UK saw average annual growth of 3.4 per cent. Between 1973 and 2007 it was 2.3 per cent, and between 2007 and 2019, it was 1.2 per cent.

However, between the first quarter of 2022 and the final quarter of last year, GDP fell. And GDP per head – growth per person – is now lower than at the end of 2019, just before the pandemic hit.

Stephen Millard of the National Institute of Economic and Social Research (NIESR) explained: “In other words, regardless of what we saw today, the UK economy is growing at a snail’s pace.”

And Michael Saunders, a senior adviser at Oxford Economics added: “The real issue for the UK is not whether the economy grows in the first quarter or not. It is that we are stuck in a prolonged rut with little or no growth in living standards. GDP per head remains lower than five years ago.”

Rise in unemployment expected to be smaller

Recessions are usually associated with large increases in unemployment.

As economic output falls, businesses scale back and don’t hire as many staff, or even consider job cuts. This can then feedback into less demand, because people have less money to spend. This can then lead to further job cuts.

Before the 2008 financial crisis for example, the unemployment rate hovered just above 5 per cent, but climbed to over 7 per cent in early 2009. It then peaked above 8 per cent in 2011.

Immediately before the 1990 recession, unemployment was below 7 per cent, but it climbed well above 9 per cent in 1991 and above 10 per cent a year later.

Unemployment is currently at 3.8 per cent, and economists do not expect it to climb much higher.

“Unemployment is likely to rise less than in those painful periods,” said Mr Saunders.

Capital Economics forecasts that unemployment will peak at 4.2 per cent in the second quarter of 2024.

But some economists have warned that unemployment may be replaced by lower pay increases.

Annual growth in regular earnings – excluding bonuses – was 6.2 per cent in October to December 2023, but some experts say this could begin to slow.

Chris Martin, an economics professor at the University of Bath, said: “I would not expect much change in unemployment. The labour market is more flexible than it used to be. That means that poor economic performance shows up in lower wage growth rather than higher unemployment.”

Fall in house prices expected to be less dramatic

In previous recession periods, house prices have dropped back dramatically. This is likely because with unemployment higher and people’s spending power lower, more people are forced to sell – because they cannot afford mortgage payments – and fewer people have the money to pay high fees for their homes.

Between February 2008 and February 2009, house prices fell by 15.6 per cent in real terms, according to ONS data.

House prices actually rose after the 2020 recession, but this was aided by a combination of very low interest rates, and Government policy aided to stimulate the market, including stamp duty cuts and an extension of the Government’s Help to Buy scheme.

House prices have fallen a little in the past year, but most major forecasters do not expect falls as dramatic as in 2008, this time round.

The Centre for Economics and Business Research (CEBR) has forecast a house price fall of 1.9 per cent over the course of 2024, and has said this forecast factored in the recession occurring.

“Our forecasts for economic variables key to formulating our UK housing market outlook are not as downbeat as those for previous recessions,” explained Cameron Misson, an economist at CEBR.

“A constricted housing supply has softened price falls and will continue to do so. New home registrations dropped by 44 per cent in 2023 compared to the previous year. Hence, the current trend in supply can largely be expected to continue,” he said.

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