Early 1990s recession
The recession of the early 1990s describes the period of economic downturn affecting much of the world in the late 1980s and early 1990s.
Causes
Percent Change From Preceding Period in Real Gross Domestic Product (annualized; seasonally adjusted); Average GDP growth 1970–2009
On Black Monday 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.
Political ramifications
While the Progressive Conservative 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."[1] 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.[2] 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%,[3] and Finland has been running consistent current account surpluses. Despite this impressive performance and strong growth mass unemployment has remained as a problem.[4]
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.[5]