Canada The Canadian economy experienced overall weakness from the start of 1980 to the end of 1983, with low yearly real GDP growth rates of 2.1% and 2.6% in 1980 and 1983, respectively, and a steep 3.2% decline in real GDP for 1982. As with other G7 countries, Canada had two separate economic contractions in the early 1980s. although both contractions were driven by the same desire of governments to reduce inflation by increasing interest rates. Real Canadian GDP declined by 5% during the 17-month 1981-82 recession with the unemployment rate peaking at 12%. In-between the two downturns, Canada had 12 months of economic growth. With growth between October 1980 and June 1981 being relatively robust, the total GDP and employment in June 1981 was surpassing their pre-recession peaks, While inflation accelerated across North America in the late 1970s, it was higher in Canada because of the US decision to switch to a
floating exchange rate, which lowered the value of the Canadian dollar to US$0.85 by 1979, which made US imports more expensive for Canadians to purchase. Canada's inflation rate was 10.2% for 1980 overall, rising to 12.5% for 1981 and 10.8% for 1982 before dropping to 5.8% for 1983. To control its inflation, the US introduced credit controls producing a slump in demand for Canada's housing and auto industry exports in early 1980 thereby triggering the early first portion of the recession in Canada. By the start of 1982, Alberta's oil boom had ended due to over-expansion and the deep global recession of that year, which caused oil prices to plummet, with Alberta then suffering a drop of 7.2 percentage points in its employment ratio of all the provinces by mid-1983. The Tokyo stock exchange doubled in 1983 from Y8,800 to Y16,401 in 1986. The surge that hit its peak of Y26,646 was temporarily halted by
Black Monday on October 14, 1987. Black Monday was a crash that ended up hitting the US stock market, causing it to plummet. By April 1988, the stock reached past its October record breaking peak and hit Y38,915. In what came to be known as the
Lost Decades, Japan's recession was prolonged into the 1990s and they were not able to recover from the increased prices until the early 2000s. It finally officially ended in 2002.
United Kingdom Economic impact Eventually recession hit the
United Kingdom at the beginning of the 1980s. That followed a string of crises that had plagued the British economy for most of the 1970s. Consequently, unemployment had gradually increased since the mid-1960s. When the
Conservative Party, led by
Margaret Thatcher won the
general election of May 1979, and swept
James Callaghan's
Labour Party from power, the country had just witnessed the
Winter of Discontent in which numerous public sector workers had staged strikes. Inflation was about 10% and some 1.5 million people were unemployed, compared to some 1 million in 1974, 580,000 in 1970 and just over 300,000 in 1964. Thatcher set about controlling inflation with
monetarist policies and changing trade union legislation in an attempt to reduce the strikes of public-sector workers. Thatcher's battle against inflation raised the exchange rate, resulting in the closure of many factories, shipyards and coal pits because imports were cheaper and the strong pound made British products more expensive in export markets. Inflation fell below 10% by the turn of 1982, having peaked at 22% in 1980, and by spring 1983, it had fallen to a 15-year low of 4%. Strikes were also at their lowest level since the early 1950s, and wage growth rose to 3.8% by 1983. Unemployment reached 12.5% of the workforce by January 1982, a level that had not been seen for some 50 years. The unemployment rate remained similarly high for a number of years afterwards.
Northern Ireland was the hardest-hit region, with unemployment standing at nearly 20%. The rate exceeded 15% in much of
Scotland and
Northern England. By April 1983, Britain became a net importer of goods for the first time in modern times. In
Significance, Grahame Allen wrote: "The UK's lack of export competitiveness and widening trade deficit is a cause for concern today, but it is far from historically unusual. Imports exceeded exports (by value) for 32 consecutive years between 1924 and 1955 and the UK has run a deficit for 78 of the 111 years since 1908." Areas of
Tyneside,
Yorkshire,
Merseyside,
South Wales,
Western Scotland and the
West Midlands were hit hard by the loss of industry and subsequent sharp rise in unemployment. Only in
South East England did unemployment remain below 10%. Despite the economic recovery that followed the early 1980s recession, unemployment in the United Kingdom barely fell until the second half of the decade. As late as 1986, unemployment exceeded 3 million, but it fell below that figure the following year. By the end of 1989, it had fallen to 1.6 million.
Social impact The mass unemployment and social discontent resulting from the recession were widely seen as major factors in the
1981 England riots in parts of towns and cities including
Toxteth,
Liverpool, as well as a number of districts of
London. In 1985, the economy had been out of recession for three years, but unemployment remained stubbornly high. Another wave of rioting occurred across numerous areas of Britain, including several areas across London. Poor employment opportunities, and social discontent were once again seen as factors in the rioting.
Recovery In the UK, economic growth was re-established by the end of 1982, but the era of mass unemployment was far from over. By the summer of 1984, unemployment had hit a new record of 3.3 million although the Great Depression had seen a higher percentage of the workforce unemployed. It remained above the 3 million mark until the spring of 1987, when the
Lawson Boom, seen as the consequence of tax cuts by Chancellor
Nigel Lawson, sparked an economic boom that saw unemployment fall dramatically. By early 1988, it was below 2.5 million; by early 1989, it fell below 2 million. By the end of 1989, it was just over 1.6 million, almost half the figure of three years earlier; however, the unemployment figures did not include benefit claimants who were placed on Employment Training schemes, an adult variant of the controversial
Youth Training Scheme, who were paid the same rate of benefit for working full-time hours. Other incentives that aided the British economic recovery after the early 1980s recession included the introduction of
enterprise zones on deindustrialised land in which traditional industries were replaced by new industries as well as commercial developments. Businesses were given temporary tax breaks, and exemptions as incentives to set up base in such areas.
United States . Source:
Bureau of Economic Analysis Like Canada, the early 1980s
recession in the
United States technically consisted of two separate downturns, one commencing in January 1980 which yielded to modest growth in July 1980 with a deeper downturn from July 1981 to November 1982. One cause was the
Federal Reserve's
contractionary monetary policy, which sought to rein in the high
inflation. In the wake of the
1973 oil crisis and the
1979 energy crisis,
stagflation began to afflict the economy.
Unemployment vs
inflation vs
inverted yield curve Unemployment had risen from 5.1% in January 1974 to a high of 9.0% in May 1975. Although it had gradually declined to 5.6% by May 1979, unemployment began rising again. It jumped sharply to 6.9% in April 1980 and to 7.5% in May 1980. A mild recession from January to July 1980 kept unemployment high, but despite economic recovery, it remained at historically high levels (about 7.5%) until the end of 1981. In mid-1982,
Rockford, Illinois, had the highest unemployment of all metro areas, at 25%. In September 1982, Michigan led the nation with 14.5%, Alabama was second with 14.3%, and West Virginia was third with 14.0%. The
Youngstown–Warren Metropolitan Area had an 18.7% rate, the highest of all metro areas, and
Stamford, Connecticut, had the lowest unemployment, at 3.5%. The peak of the recession occurred in November and December 1982, when the nationwide unemployment rate was 10.8%, the highest since the
Great Depression. In November, West Virginia and Michigan had the highest unemployment with 16.4%, Alabama was in third with 15.3%. South Dakota had the lowest unemployment rate in the nation, with 5.6%.
Flint, Michigan, had the highest unemployment rate of all metro areas, with 23.4%. In March 1983, West Virginia's unemployment rate hit 20.1%. In spring 1983, thirty states had double-digit unemployment. When Reagan was
re-elected in 1984, the latest unemployment numbers (August 1984) showed that West Virginia still had the highest rate in the nation (13.6%) followed by Mississippi (11.1%) and Alabama (10.9%).
Inflation Inflation, which had averaged 3.2% annually since
World War II had more than doubled after the 1973 oil shock, to a 7.7% annual rate. Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980, it soared to 13.5%. A brief recession occurred in 1980. Several key industries, including housing, steel manufacturing, and automobiles, experienced a downturn from which they did not recover until the end of the next recession. Many of the economic sectors that supplied the basic industries were also hit hard. Each period of high unemployment saw the Federal Reserve increase interest rates to reduce high inflation. Each time, once inflation fell and interest rates were lowered, unemployment slowly fell. Determined to wring inflation out of the economy,
Federal Reserve chairman Paul Volcker slowed the rate of growth of the money supply and raised
interest rates. The
federal funds rate, which was about 11% in 1979, rose to 20% by June 1981. The
prime interest rate, an important economic measure, eventually reached 21.5% in June 1982.
Banks The recession came at a bad time for banks because of a recent wave of
deregulation. The
Depository Institutions Deregulation and Monetary Control Act of 1980 had phased out a number of restrictions on their financial practices, broadened their lending powers, and raised the
deposit insurance limit from $40,000 to $100,000, which caused
moral hazard. Banks rushed into
real estate lending, speculative lending, and other ventures as the economy soured. By mid-1982, the number of bank failures was rising steadily. Bank failures reached 42, the highest since the depression, as both the recession and high
interest rates took their toll. By the end of the year, the
Federal Deposit Insurance Corporation (FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat. In July 1982, the
US Congress enacted the
Garn–St. Germain Depository Institutions Act of 1982, which further deregulated banks, savings and loans. The Act authorized banks to begin offering
money market accounts in an attempt to encourage
deposit in-flows, and it also removed additional statutory restrictions in real estate lending and relaxed loans-to-one-borrower limits. That encouraged a rapid expansion in real estate lending while the real estate market was collapsing, increased the unhealthy competition between banks, savings and loans, and encouraged too many
branches to be started.
Savings and loan crisis The recession also significantly exacerbated the savings and loan crisis. In 1980, there were approximately 4590 state and federally chartered savings and loan institutions (S&Ls), with total assets of $616 billion. From 1979, they began losing money because of spiraling interest rates. Net S&L income, which had totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981 and a loss of $4.1 billion in 1982. The
tangible net worth for the entire S&L industry was virtually zero. The FHLBB relied heavily on its persuasive powers and the
US states to enforce banking regulations. One consequence of the FHLBB's lack of enforcement abilities was the promotion of deregulation and of aggressive, expanded lending to forestall
insolvency. In November 1980, the FHLBB lowered
net worth requirements for federally insured S&Ls from 5% of deposits to 4%. The FHLBB lowered net worth requirements again to 3% in January 1982. Additionally, the agency required S&Ls to meet those requirements only over 20 years. The rule meant that S&Ls less than 20 years old had practically no
capital reserve requirements. That encouraged extensive chartering of new S&Ls since a $2 million investment could be leveraged into $1.3 billion in lending. As the risk exposure of S&Ls expanded, the economy slid into the recession. Soon, hundreds of S&Ls were insolvent. Between 1980 and 1983, 118 S&Ls with $43 billion in assets failed. The Federal Savings and Loan Insurance Corporation, the federal agency which insured the deposits of S&Ls, spent $3.5 billion to make depositors whole again (in comparison, only 143 S&Ls with $4.5 billion in assets had failed in the previous 45 years, costing the FSLIC $306 million). Federal action initially caused the problem by allowing institutions to get involved in creating wealth by unhealthy fractional reserve practices, lending out much more money than they could ever afford to pay back out to customers if they came to withdraw their money. That ultimately led to S&Ls' failure. Later, the government's inaction worsened the industry's problems. Responsibility for handling the S&L crisis lay with the
Cabinet Council on Economic Affairs (CCEA), an intergovernmental council located within the Executive Office of the President. At the time, the CCEA was chaired by
Treasury Secretary Donald Regan. The CCEA pushed the FHLBB to refrain from re-regulating the S&L industry and adamantly opposed any governmental expenditures to resolve the S&L problem. Furthermore, the
Reagan administration did not want to alarm the public by closing a large number of S&Ls. Such actions significantly worsened the S&L crisis.
Political fallout The recession was nearly a year old before President
Ronald Reagan stated on October 18, 1981, that the economy was in a "slight recession". The recession, coupled with budget cuts, which were enacted in 1981 but began to take effect only in 1982, led many voters to believe that Reagan was insensitive to the needs of average citizens and favored the
wealthy. Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a
corporate tax increase in 1982; however, he refused to raise
income tax or to cut defense spending. The
Tax Equity and Fiscal Responsibility Act of 1982 instituted a three-year, $100 billion tax hike, the largest tax increase since the
Second World War.
Recovery According to
Keynesian economists, a combination of
deficit spending and the lowering of interest rates would slowly lead to economic recovery. Many economists also insist that the significantly-lower tax rates significantly contributed to the recovery. From a high of 10.8% in December 1982, unemployment gradually improved until it fell to 7.2% on
Election Day in 1984. Inflation fell from 10.3% in 1981 to 3.2% in 1983. Corporate income rose by 29% in the July–September quarter of 1983, compared with the same period in 1982. Some of the most dramatic improvements came in industries that were the hardest hit by the recession, such as paper and forest products, rubber, airlines, and the auto industry. == See also ==