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AS Macroeconomics / International Economy

UK Economic Cycle

The economic cycle is also known as the business cycle. The chart above shows the annual rate of growth of national output for the UK economy since 1980. There have been two recessions in the last twenty-five years. The early 1980s downturn was a deep recession – the worst downturn in the UK’s post-war history. We can see the descent into recession in 1990 and 1991 and then a recovery which was maintained throughout the remainder of the 1990s. Further positive rates of growth have been sustained in the first six years of the current decade, allowing the UK economy to claim one of the longest periods of expansion in our modern history. After a slowdown in 2005 the British economy looked to be enjoying stronger growth in the first half of 2006.

As we shall see later, all countries go through a business or economic cycle leading to fluctuations in national output and unemployment. The chart below shows what has happened to the US economy over recent years.

The United States enjoyed a period of fast growth during the second half of the 1990s. But a combination of rising interest rates (the US central bank raised the cost of borrowing to curb the growth of consumption) and of course the fallout from the events of 9-11 which severely affected consumer and business confidence brought about a sharp slowdown in their growth rate. The USA economy went into a steep slowdown – but although, for a short period, national output did fall, the annual growth rate stayed positive before a recovery emerged in 2002 and 2003. In 2003, the US economy grew by 3% and growth climbed above 4% in 2004 before edging lower in 2005. The United States has been running a policy of low interest rates for most of the current decade. But between 2004 and 2006, they have been gradually increasing interest rates in a bid to control demand and inflationary pressures. As a result, the speed of growth in the USA is now starting to slowdown.

US interest rates and real gdp growth

We can compare and contrast the relative performance of different countries by making use of the economic data published for each nation. The main source of data for the UK is via the Office for National Statistics where there is a wealth of information not just on Britain but also for each of our regions and for other countries as well.

Author: Geoff Riley, Eton College, September 2006

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AS Macroeconomics / International Economy

UK Economic Cycle

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