Three centuries of UK business cycles: what lessons for today?

Evidence from 300 years of peaks and troughs in UK economic activity reveals that while the frequency of recessions has declined to a historical low, the duration and amplitude have not. A recession may result from a variety of causes, with a typical cost to the economy of 4% of initial GDP.

Today’s recessionary times feel unprecedented to many of us. After a long economic expansion from 1992 through to 2007-08, we have suffered a set of recessionary impulses of quite different types. These impulses illustrate the wide range of economic fluctuations to which the word ‘recession’ can be applied and which have been experienced in the UK economy over the last three centuries.

The short, sharp period of negative economic growth in the aftermath of the global financial crisis of 2007-09 was followed by an extended period when growth seemed to fall far below its historic average. The Covid-19 pandemic and the lockdowns of 2020-21 then led to the largest ever recorded falls in economic activity, an experience from which the economy has yet to recover fully given the fall in labour force participation. More recently, Russia’s invasion of Ukraine prompted a sustained escalation in energy prices, which for energy-importing countries has led to a persistent fall in real incomes.

Pandemics, wars and commodity price rises have all been important drivers of recessions in the past. Arguably, what makes the current situation unprecedented is the close succession and persistent effect of those adverse shocks. The likely culmination was reflected in the November 2022 Monetary Policy Report from the Bank of England, which outlined a projection where the duration of the recession for the UK economy would be the longest on record.

As there are many ways in which growth can disappoint, we need to frame recessionary impulses in terms of the amplitude – the peak to trough fall in output – and the duration – the number of months or quarters – of the economic contraction. The Bank has projected eight quarters of contraction with a peak to trough fall in output of just under 3%.

The popular definition of a recession involving two successive quarters of a contraction in economic activity is recognised to be rather arbitrary and often misleading. This is because it inadequately captures the various patterns that a contraction may take. But it may also lead to errors, since relying on early releases of GDP data alone, which are subject to repeated revisions in the Office for National Statistics (ONS) Blue Book, may not provide a very good signal about a sustained and widespread interruption in economic growth.

We also need to understand the structural question of whether the recession is one in which the level of aggregate demand has temporarily fallen below potential supply, or whether the economy is adjusting to a lower level of potential supply. There is also the possibility that demand and supply might interact to lead to some form of low growth trap, which was Keynes’ original insight.

Historical records can offer a better understanding of recessions as part of the business cycle. But despite a long tradition of time-stamping these events for the UK (going back to the major contributions of Burns and Mitchell, 1946; Gayer et al, 1953; Ashton, 1959; and Rostow, 1972), the result is a patchwork of chronologies, which do not provide a clear, long-run picture of the peaks and troughs in UK economic activity.

In a new study, we construct a chronology of the business cycle in the UK, from 1700 on an annual basis and from 1920 on a quarterly basis and end our analysis in 2010 (Broadberry et al, forthcoming). To support this task, the National Institute of Economic and Social Research (NIESR) drew on the expertise of the UK Business Cycle Dating Committee, which includes leading academics and policy-makers.

The chronology is based on our judgement of individual business cycle fluctuations, the historical context, the most reliable national accounts available, and an overall view of movements across sectors. Figure 1 plots the identified recessions alongside the natural logarithms of GDP at market prices and GVA (gross value added) at factor cost.

Figure 1: New annual chronology of UK business cycles, 1700-2010

Source: Authors' calculations

Note: Shaded areas represent recessions.

The overall business cycle, measured from one peak in activity to the next peak, seems to have changed over the three centuries. First, the business cycle has increased in both duration and amplitude between the long 18^th century and the post-war period, extending in duration from around three to four years to about 16 years, and rising in amplitude from 3.2% to 51.9%. This means that drawing on pre-2010 data, we could expect a business cycle to last well into its teens and to have led to an increase in GDP of over 50% by its end. Such expectations seem rather frustrated by our subsequent experience.

Second, prior to 2010, recessions had become less frequent, occurring roughly every other year in the long 18^th century (1701-1816), every fourth year in the Pax Britannica (1817-1908) and trans-war periods (1909-47), and every ninth year since the Second World War (1948-2009).

While the frequency of recessions has declined to a historical low, the duration and amplitude have not. Post-war recessions have been longer on average than those in the 18^th and 19^th centuries, although not as long as those during the trans-war period, and have been more costly than those in the 19^th century, albeit not as much as downturns in the 18^th century or the trans-war period.

Third, the average recession between 1700 and 2010 has been tick-shaped, with a short contraction and a slightly longer recovery. As Figure 2 shows, in the first year of a contraction, GDP falls, on average, by 2.5%. In the second year, growth returns but the level of economic activity remains below the peak. The average recovery is complete in the third year as the pre-recession peak is surpassed. But the mean estimates mask the considerable heterogeneity of recessions in UK history.

Figure 2: The shape of recessions 1700-2010

Source: Authors' calculations

Note: The blue line is the historical average and the shaded area represents the 95% confidence interval calculated using the standard error of the mean recession at each point. The standard deviation of the sample is almost eight times larger than the standard error, given a sample size of 59 recessions.

Where does the prospective recession of 2022-23 stand in comparison with the historical average? The GDP projections in the November 2022 Monetary Policy Report were produced under two conditioning assumptions for monetary policy: one based on an assumption of a constant Bank Rate of 3%; and another based on a path where Bank Rate rose in line with the then elevated levels of market expectations.

The 2022-23 recession implied by the projection under market expectations was initially shallower but more protracted than the historical mean of the past three centuries. But it is quite similar to some of the recessions observed over the past 100 years, reflecting the increased persistence of recessions from the 20^th century onwards (Figure 3). In particular, the 2022-23 recession looks similar in scale to the recession of the early 1990s over the first two years, but then similar to the protracted recoveries from the Great Depression and the global financial crisis.

The protracted recovery in the Bank of England projection is based on an assumption that potential supply growth remains weak relative to the trend growth rates enjoyed between the end of the Second World War and the global financial crisis.

The weakness of growth and productivity in the aftermath of the recessions since 2007/08 is a key policy issue (Chadha and Samiri, 2022). Perhaps those recessions have led to more scarring or ‘hysteresis’ effects on both the level and rate of economic growth. That would imply that acting to prevent recessions is a key part of avoiding weak longer-run growth in living standards.

Figure 3: Quarterly peacetime recessions from 1930 onwards: retrospect and prospect

Source: Authors' calculations

Note: The recession following the pandemic in 2020 is not included given the scale of the output fall.

Fourth, according to the long historiography on UK business cycles, the main causes of recessions appear to have been sectoral shocks (mainly in agriculture), financial crises and wars. So although the confluence of recent shocks is unusual, it is not unique.

The deep recession of 1919-21, which occurred just after the First World War, has many parallels with the recession following the pandemic in 2020-21. Both involved double-digit percentage falls in GDP from their respective peaks. The 1919-21 recession also involved a considerable sectoral reallocation of resources as a result of demobilisation, a major pandemic in the form of Spanish flu, industrial unrest on a scale equivalent to the 1926 General Strike, and a large fall in labour supply with the move to a 48-hour week (Broadberry, 1986).

One striking aspect of our analysis is the extent to which monetary and fiscal policies have increasingly played a role in determining the shape of the business cycle. The policies adopted in the immediate aftermath of the Napoleonic wars and the First World War both aimed to restore the fiscal and monetary credibility of the pre-war regimes (see Chadha and Newby, 2013; and Moggridge, 1969).

On both occasions, the policies adopted were argued to have contributed to the recessions that occurred in their aftermath. It might be worth asking whether recessions are a necessary cost of restoring monetary and fiscal credibility after large adverse shocks.

An assessment in the early 1960s of the ‘go-stop cycle’ that emerged after the Second World War was critical of attempts by the authorities to use macroeconomic policy to stabilise the economy and maintain full employment:

‘The major fluctuations in the rate of growth of demand and output in the years after 1952 were thus chiefly due to government policy. This was not the intended effect; in each phase, it must be supposed, policy went further than intended, as in turn did the correction of those effects. As far as internal conditions are concerned then, budgetary and monetary policy failed to be stabilising, and must on the contrary be regarded as having been positively destabilising’ (Dow, 1964).

But it has also been argued that policy in other periods has acted to stabilise the economy and reduce the amplitude of fluctuations (Hills et al, 2010; and Chadha, 2022) especially in the long expansion from 1992 to 2007/08. Teasing out the extent to which policy has played a role in dampening or stoking recessions remains a critical question for economists and policy-makers alike.

Ultimately, an economic statistic is only as good as its inputs and the economic structure used to measure it. Our study (Broadberry et al, forthcoming) makes comprehensive use of the corpus of national accounts available for the UK that provide some guidance on understanding current business cycles. But we do anticipate that as the mass of economic information evolves, so will this business cycle chronology.

Looking to the past, new data would be valuable to address the inconsistencies in quality and quantity over time (Solomou and Thomas, 2022). Looking ahead, the chronology will be extended to include the expansions and contractions since 2010.

There is a strong possibility that what we have witnessed since the global financial crisis of 2007-09 is a change in business cycle behaviour as radical as that from the 18^th to the 19^th century and again after the post-war period. This change may help us to understand the sense of disillusion that has accompanied contemporary commentary on the state of the UK economy.

Where can I find out more?

Dating Business Cycles in the United Kingdom, 1700-2010: forthcoming Economic History Review study by Stephen Broadberry, Jagjit Chadha, Jason Lennard and Ryland Thomas.
Growing, Shrinking, and Long Run Economic Performance: Historical Perspectives on Economic Development’: 2017 National Bureau of Economic Research paper by Stephen Broadberry and John Joseph Wallis.
Commentary: The Economic Landscape of the UK: 2017 National Institute Economic Review commentary by Jagjit Chadha.
What Happens During Recessions, Crunches, and Busts?: 2009 Economic Policy study by Stijn Claessens, Ayhan Kose and Marco Terrones.
UK Business and Financial Cycles Since 1660 Volume I: A Narrative Overview: 2019 book by Nicholas Dimsdale and Ryland Thomas.
The UK Recession in Context — What Do Three Centuries of Data Tell Us?: 2010 Bank of England Quarterly Bulletin study by Sally Hills, Ryland Thomas and Nicholas Dimsdale.