Late 1980s recession
Encyclopedia
The recession of the early 1990s describes the period of economic downturn affecting much of the world in the late 1980s and early 1990s.
of October 1987 a stock collapse of unprecedented size caused the Dow Jones Industrial Average
to fall by 22.6%. This collapse, larger than that of 1929, was handled well by the economy
, and the stock market
began to quickly recover. However, in North America, the lumbering savings and loans industry was beginning to collapse, leading to a savings and loan crisis
which put the financial wellbeing of millions of Americans in jeopardy.
The panic that followed led to a sharp recession through financial contagion
, that hit hardest those countries most closely linked to the United States, including Canada
, Australia
, and the United Kingdom
. The economies of much of Europe
and Japan
were hurt, but not as badly. The US economy continued to grow as a whole, although certain sectors of the market such as energy and real estate slumped.
The first burst of the recession was short-lived, as fervent pre-election activity by the governments of the United States and Canada created what many economists at the time saw as an economic miracle: a growing consumer confidence
and increased consumer spending
almost single-handedly lifted the North American economy out of recession.
It soon turned out that the quick recovery was illusory, and by 1990, economic malaise had returned with the beginning of the Gulf War
and the resulting 1990 spike in the price of oil, which increased inflation but to less of a degree as the oil crisis ten years earlier. Nevertheless, for the next several years high unemployment, massive government budgetary deficits, and slow Gross Domestic Product
(GDP) growth affected the United States until late 1992 and Canada until 1995.
The rest of the world was less affected by the downturn; Germany
and Japan
both grew rapidly. Some pundits guessed that this would be a permanent state of affairs and that both the German and Japanese economies would grow to be larger than the American one.
Like all recessions, the one of the late 1980s and early 1990s had a profound impact on society. Rates of alcoholism
and drug abuse
increased, as did rates of depression
.
government of Brian Mulroney
in Canada
and the successful election campaign of George H. W. Bush
in the United States may have been aided by the brief recovery of 1988, neither leader could hold on to power through the last part of the recession, both being swept out by opponents running on pledges to restore the economy to health. Bush's 1992 re-election bid was particularly hampered by his 1990 decision to renege on his "Read my lips: no new taxes
" pledge during his first campaign in 1988.
In Australia
, Paul Keating
(then Treasurer of Australia
, and future Prime Minister), referred to it as "the recession that Australia had to have." This quote became a cornerstone of the opposition Liberal Party
's campaign during the 1993 election, designed to underscore alleged mismanagement of the national economy by the incumbent Labor Party
. Unlike the opposition parties in North America, however, the Liberal Party failed to enter government.
In neighboring New Zealand
, the recession came after the re-election of the reformist Lange Labour
government. The impact of economic reforms (known as Rogernomics
) in the recession led to deep policy divisions between the Prime Minister, David Lange
, and the Minister of Finance, Roger Douglas
. In response to the recession, Douglas wanted to increase the pace of reform, whereas Lange sought to prevent further reform. Douglas resigned from Cabinet in 1988, but was re-appointed to Cabinet in 1989, prompting Lange to resign. Labour lost the 1990 general elections
by a landslide to the National Party
, who continued with Douglas' reforms.
Finland
underwent severe economic depression in 1990–93. Badly managed financial deregulation of the 1980s, in particular removal of bank borrowing controls and liberation of foreign borrowing, combined with strong currency and a fixed exchange rate policy led to a foreign debt financed boom. Bank borrowing increased at its peak over 100% a year and asset prices skyrocketed. The collapse of the Soviet Union
in 1991 led to a 70% drop in trade with Russia and eventually Finland was forced to devaluate
, which increased the private sector's foreign currency denominated debt burden. At the same time authorities tightened bank supervision and prudential regulation, lending dropped by 25% and asset prices halved. Combined with raising savings rate and worldwide economic troubles, this led to a sharp drop of aggregate demand
and a wave of bankruptcies. Credit losses mounted and a banking crisis inevitability followed. A number of companies went down by 15%, real GDP contracted about 14% and unemployment rose from 3% to nearly 20% in four years. Recovery has been based on exports, after currency devaluation of 40% and reviving world economy share of exports as percentage of GDP has raised from 20% to 45%, and Finland has been running consistent current account surpluses. Despite this impressive performance and strong growth mass unemployment has remained as a problem.
Despite several major economies showing quarterly detraction during 1989, the British
economy continued to grow well into 1990, with the first quarterly detraction taking place in the third quarter of the year. Economic growth was not re-established until early 1993, with the end of the recession being officially declared on 26 April that year, but the Conservative government which had been in power continuously since 1979 managed to achieve re-election in April 1992
after the replacement of long-serving Margaret Thatcher
with John Major
as prime minister in November 1990 helped fend off a strong challenge from Neil Kinnock
and Labour
. The early 1990s recession was officially the longest in Britain since the Great Depression
some 60 years earlier. However, the recession of the early 1980s brought a sharper fall in output and an even greater rise and level of unemployment. Unemployment in Britain rose from 1,600,000 to nearly 3,000,000 between April 1990 and February 1993 (as opposed to the rise from 1,500,000 to 3,200,000 that had occurred as a result of recession between 1979 and 1983), and with the return of economic growth it began to fall from early 1993 and within five years was back to pre-recession levels.
Following the end of this recession, the British economy enjoyed a record run of unbroken economic growth which lasted more than 15 years until the economy lurched back into recession during 2008
- an economic downturn which was ultimately even worse than that of the early 1990s.
Causes
On Black MondayBlack Monday (1987)
In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...
of October 1987 a stock collapse of unprecedented size caused the Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
to fall by 22.6%. This collapse, larger than that of 1929, was handled well by the economy
Economic system
An economic system is the combination of the various agencies, entities that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange along which goods, money etc. are continuously flowing. An example of such a system for a closed...
, and the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
began to quickly recover. However, in North America, the lumbering savings and loans industry was beginning to collapse, leading to a savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
which put the financial wellbeing of millions of Americans in jeopardy.
The panic that followed led to a sharp recession through financial contagion
Financial contagion
Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission...
, that hit hardest those countries most closely linked to the United States, including Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, and the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. The economies of much of Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
and Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
were hurt, but not as badly. The US economy continued to grow as a whole, although certain sectors of the market such as energy and real estate slumped.
The first burst of the recession was short-lived, as fervent pre-election activity by the governments of the United States and Canada created what many economists at the time saw as an economic miracle: a growing consumer confidence
Consumer confidence
Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as...
and increased consumer spending
Consumer spending
Consumer spending or consumer demand or consumption is also known as personal consumption expenditure. It is the largest part of aggregate demand or effective demand at the macroeconomic level...
almost single-handedly lifted the North American economy out of recession.
It soon turned out that the quick recovery was illusory, and by 1990, economic malaise had returned with the beginning of the Gulf War
Gulf War
The Persian Gulf War , commonly referred to as simply the Gulf War, was a war waged by a U.N.-authorized coalition force from 34 nations led by the United States, against Iraq in response to Iraq's invasion and annexation of Kuwait.The war is also known under other names, such as the First Gulf...
and the resulting 1990 spike in the price of oil, which increased inflation but to less of a degree as the oil crisis ten years earlier. Nevertheless, for the next several years high unemployment, massive government budgetary deficits, and slow Gross Domestic Product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) growth affected the United States until late 1992 and Canada until 1995.
The rest of the world was less affected by the downturn; Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
and Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
both grew rapidly. Some pundits guessed that this would be a permanent state of affairs and that both the German and Japanese economies would grow to be larger than the American one.
Like all recessions, the one of the late 1980s and early 1990s had a profound impact on society. Rates of alcoholism
Alcoholism
Alcoholism is a broad term for problems with alcohol, and is generally used to mean compulsive and uncontrolled consumption of alcoholic beverages, usually to the detriment of the drinker's health, personal relationships, and social standing...
and drug abuse
Drug abuse
Substance abuse, also known as drug abuse, refers to a maladaptive pattern of use of a substance that is not considered dependent. The term "drug abuse" does not exclude dependency, but is otherwise used in a similar manner in nonmedical contexts...
increased, as did rates of depression
Depression (mood)
Depression is a state of low mood and aversion to activity that can affect a person's thoughts, behaviour, feelings and physical well-being. Depressed people may feel sad, anxious, empty, hopeless, helpless, worthless, guilty, irritable, or restless...
.
Political ramifications
While the Progressive ConservativeProgressive Conservative Party of Canada
The Progressive Conservative Party of Canada was a Canadian political party with a centre-right stance on economic issues and, after the 1970s, a centrist stance on social issues....
government of Brian Mulroney
Brian Mulroney
Martin Brian Mulroney, was the 18th Prime Minister of Canada from September 17, 1984, to June 25, 1993 and was leader of the Progressive Conservative Party of Canada from 1983 to 1993. His tenure as Prime Minister was marked by the introduction of major economic reforms, such as the Canada-U.S...
in Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
and the successful election campaign of George H. W. Bush
George H. W. Bush
George Herbert Walker Bush is an American politician who served as the 41st President of the United States . He had previously served as the 43rd Vice President of the United States , a congressman, an ambassador, and Director of Central Intelligence.Bush was born in Milton, Massachusetts, to...
in the United States may have been aided by the brief recovery of 1988, neither leader could hold on to power through the last part of the recession, both being swept out by opponents running on pledges to restore the economy to health. Bush's 1992 re-election bid was particularly hampered by his 1990 decision to renege on his "Read my lips: no new taxes
Read my lips: no new taxes
"Read my lips: no new taxes" is a now-famous phrase spoken by then presidential candidate George H. W. Bush at the 1988 Republican National Convention as he accepted the nomination on August 18. Written by speechwriter Peggy Noonan, the line was the most prominent sound bite from the speech...
" pledge during his first campaign in 1988.
In Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Paul Keating
Paul Keating
Paul John Keating was the 24th Prime Minister of Australia, serving from 1991 to 1996. Keating was elected as the federal Labor member for Blaxland in 1969 and came to prominence as the reformist treasurer of the Hawke Labor government, which came to power at the 1983 election...
(then Treasurer of Australia
Treasurer of Australia
The Treasurer of Australia is the minister in the Government of Australia responsible for government expenditure and revenue raising. He is the head of the Department of the Treasury. The Treasurer plays a key role in the economic policy of the government...
, and future Prime Minister), referred to it as "the recession that Australia had to have." This quote became a cornerstone of the opposition Liberal Party
Liberal Party of Australia
The Liberal Party of Australia is an Australian political party.Founded a year after the 1943 federal election to replace the United Australia Party, the centre-right Liberal Party typically competes with the centre-left Australian Labor Party for political office...
's campaign during the 1993 election, designed to underscore alleged mismanagement of the national economy by the incumbent Labor Party
Australian Labor Party
The Australian Labor Party is an Australian political party. It has been the governing party of the Commonwealth of Australia since the 2007 federal election. Julia Gillard is the party's federal parliamentary leader and Prime Minister of Australia...
. Unlike the opposition parties in North America, however, the Liberal Party failed to enter government.
In neighboring New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
, the recession came after the re-election of the reformist Lange Labour
Fourth Labour Government of New Zealand
The Fourth Labour Government of New Zealand was the government of New Zealand from 26 July 1984 to 2 November 1990. It enacted major social and economic reforms, including reformation of the tax system. The economic reforms were known as Rogernomics after Finance Minister Roger Douglas...
government. The impact of economic reforms (known as Rogernomics
Rogernomics
The term Rogernomics, a portmanteau of "Roger" and "economics", was coined by journalists at the New Zealand Listener by analogy with Reaganomics to describe the economic policies followed by Roger Douglas after his appointment in 1984 as Minister of Finance in the Fourth Labour Government...
) in the recession led to deep policy divisions between the Prime Minister, David Lange
David Lange
David Russell Lange, ONZ, CH , served as the 32nd Prime Minister of New Zealand from 1984 to 1989. He headed New Zealand's fourth Labour Government, one of the most reforming administrations in his country's history, but one which did not always conform to traditional expectations of a...
, and the Minister of Finance, Roger Douglas
Roger Douglas
Sir Roger Owen Douglas , is a New Zealand politician who formerly served as a senior New Zealand Labour Party Cabinet minister. He became arguably best-known for his prominent role in the radical economic restructuring undertaken by the Fourth Labour Government during the 1980s...
. In response to the recession, Douglas wanted to increase the pace of reform, whereas Lange sought to prevent further reform. Douglas resigned from Cabinet in 1988, but was re-appointed to Cabinet in 1989, prompting Lange to resign. Labour lost the 1990 general elections
New Zealand general election, 1990
The 1990 New Zealand general election was held on 27 October to determine the composition of the 43rd New Zealand parliament. The governing Labour Party was defeated, ending its controversial two terms in office...
by a landslide to the National Party
New Zealand National Party
The New Zealand National Party is the largest party in the New Zealand House of Representatives and in November 2008 formed a minority government with support from three minor parties.-Policies:...
, who continued with Douglas' reforms.
Finland
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
underwent severe economic depression in 1990–93. Badly managed financial deregulation of the 1980s, in particular removal of bank borrowing controls and liberation of foreign borrowing, combined with strong currency and a fixed exchange rate policy led to a foreign debt financed boom. Bank borrowing increased at its peak over 100% a year and asset prices skyrocketed. The collapse of the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
in 1991 led to a 70% drop in trade with Russia and eventually Finland was forced to devaluate
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
, which increased the private sector's foreign currency denominated debt burden. At the same time authorities tightened bank supervision and prudential regulation, lending dropped by 25% and asset prices halved. Combined with raising savings rate and worldwide economic troubles, this led to a sharp drop of aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
and a wave of bankruptcies. Credit losses mounted and a banking crisis inevitability followed. A number of companies went down by 15%, real GDP contracted about 14% and unemployment rose from 3% to nearly 20% in four years. Recovery has been based on exports, after currency devaluation of 40% and reviving world economy share of exports as percentage of GDP has raised from 20% to 45%, and Finland has been running consistent current account surpluses. Despite this impressive performance and strong growth mass unemployment has remained as a problem.
Despite several major economies showing quarterly detraction during 1989, the British
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
economy continued to grow well into 1990, with the first quarterly detraction taking place in the third quarter of the year. Economic growth was not re-established until early 1993, with the end of the recession being officially declared on 26 April that year, but the Conservative government which had been in power continuously since 1979 managed to achieve re-election in April 1992
United Kingdom general election, 1992
The United Kingdom general election of 1992 was held on 9 April 1992, and was the fourth consecutive victory for the Conservative Party. This election result was one of the biggest surprises in 20th Century politics, as polling leading up to the day of the election showed Labour under leader Neil...
after the replacement of long-serving Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
with John Major
John Major
Sir John Major, is a British Conservative politician, who served as Prime Minister of the United Kingdom and Leader of the Conservative Party from 1990–1997...
as prime minister in November 1990 helped fend off a strong challenge from Neil Kinnock
Neil Kinnock
Neil Gordon Kinnock, Baron Kinnock is a Welsh politician belonging to the Labour Party. He served as a Member of Parliament from 1970 until 1995 and as Labour Leader and Leader of Her Majesty's Loyal Opposition from 1983 until 1992 - his leadership of the party during nearly nine years making him...
and Labour
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
. The early 1990s recession was officially the longest in Britain since the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
some 60 years earlier. However, the recession of the early 1980s brought a sharper fall in output and an even greater rise and level of unemployment. Unemployment in Britain rose from 1,600,000 to nearly 3,000,000 between April 1990 and February 1993 (as opposed to the rise from 1,500,000 to 3,200,000 that had occurred as a result of recession between 1979 and 1983), and with the return of economic growth it began to fall from early 1993 and within five years was back to pre-recession levels.
Following the end of this recession, the British economy enjoyed a record run of unbroken economic growth which lasted more than 15 years until the economy lurched back into recession during 2008
Late 2000s recession
The late-2000s recession, sometimes referred to as the Great Recession or Lesser Depression or Long Recession, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world...
- an economic downturn which was ultimately even worse than that of the early 1990s.
See also
- Savings and loan crisisSavings and Loan crisisThe savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
- Credit crunchCredit crunchA credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
- Gulf WarGulf WarThe Persian Gulf War , commonly referred to as simply the Gulf War, was a war waged by a U.N.-authorized coalition force from 34 nations led by the United States, against Iraq in response to Iraq's invasion and annexation of Kuwait.The war is also known under other names, such as the First Gulf...
- List of recessions in the United States