Despite suffering one of the deepest recessions in its history, the UK remains the third-largest economy in Europe and the sixth-largest in the world. In recent decades, it has become increasingly dependent on services, particularly banking and insurance, as industry has declined in importance.
Following the 1992 recession, Britain enjoyed its longest period of sustained growth in more than two centuries, ushering in a period of low inflation, low interest rates and low unemployment. But the economy’s reliance on financial services exposed the UK, and it was hit particularly hard by the global crisis of 2008. In response, the then Labour government nationalised large parts of the country’s banking sector, taking an 83 per cent stake in the Royal Bank of Scotland and a 41 per cent stake in Lloyds.
However, a collapse in consumer spending, a slump in house prices and the global downturn pushed the economy into recession in the third quarter of 2008. The government, led by Gordon Brown, responded by cutting VAT to 15 per cent, suspending public-sector borrowing rules and bringing forward capital spending in an effort to stimulate the economy. At the same time, the Bank of England reduced interest rates to a record low of 0.5 per cent, where they remain, and embarked on £200bn of quantitative easing, creating electronic money to purchase government bonds and other assets.
After six consecutive quarters of negative growth, the UK emerged from recession in the final quarter of 2009, but it has since endured its slowest recovery since the end of the First World War. More than three years after the financial crisis struck, output remains 4 per cent below its peak, and more than 10 per cent below the pre-crisis trend.
The independent Office for Budget Responsibility predicts that the economy will grow by 0.7 per cent in 2012 and 2.1 per cent in 2013. As a result of weaker-than-expected growth, the coalition government has been forced to abandon its aim of eliminating the structural deficit (the part of the deficit that exists regardless of how well the economy is performing) by 2015. It now expects to do so in 2016-2017.
Public-sector net borrowing is forecast to be £79bn (4.5 per cent of GDP) in 2014-2015 and the national debt £1.4trn (78 per cent of GDP). The forecast is for unemployment to peak at 2.8 million (8.7 per cent of the population) in 2012.
In October 2011, the Bank of England announced a further £75bn of quantitative easing in an attempt to expand availability of credit for businesses and prevent a second credit crunch.