Suez Crisis to COVID pandemic: How economic shocks have shaped history
As the double blow of the COVID pandemic and war in Ukraine has caused inflation to surge and growth to slow in the UK, mounting recession fears, we take a look at how other economic shocks have shaped history.
1956 to 1957: Suez crisis
On 26 July 1956, Egypt nationalised the Suez Canal Company and unilaterally assumed control of the canal, displacing the international consortium that had run it for nearly a century, prompting an international crisis and a financial downturn in the UK.
Under threat of sanctions from the United Nations, tens of millions of pounds were used from UK reserves, with the prospect of sterling being devalued, the Office for National Statistics (ONS), said.
By early 1956 annual inflation reached around 7% and in spring and summer of that year GDP shrank for two successive quarters.
1973 to 1975: Oil price shock
The world saw a number of oil shocks in the 1970s as a result of conflict in the Middle East.
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In 1973, Middle Eastern oil producers halted supply from the US and other Western nations after they assisted Israel during the Arab-Israeli war that year.
The Iran revolution from 1978-1979, which led to the ousting of the Shah of Iran, also triggered another energy shock.
This effectively put an end to the post-war economic recovery in the UK and was a period of high inflation and unemployment.
Production stalled because of weak trade and the miners' strikes, leading to a three-day working week in 1974 to save the country's electricity.
Consumer spending was also down, because of high unemployment and low wages.
Indicative modelled data suggests annual CPIH inflation rose from around 7% in January 1973 to 20% in August 1975. This was the highest level recorded, in part as a result of the OPEC oil embargo.
During the Yom Kippur War an oil embargo was put on Western countries by the organisation of the Petroleum Exporting Countries (OPEC), causing oil prices to triple.
The shock also reverberated across the housing market. The average house price growth had risen 50% in the year to early 1973, but slowed dramatically amid the economic crisis.
The UK’s GDP fell by 7.7% from its peak in early 1974 to trough in early 1975. It took three-and-a-half years to fully recover.
1979 to 1981: Winter of discontent
It was the perfect storm of industrial disputes, rising inflation and fuel shortages which became known as the Winter of discontent.
That winter was a period of rising inflation and high unemployment. Energy prices rose sharply in 1979, caused by a drop in oil production in the wake of the Iranian Revolution.
Widespread trade union strikes paved the way for the election of Margaret Thatcher and a shift in economic policy.
In a bid to curb inflation strict fiscal policy of cutting public spending alongside high interest rates and high taxes was pursued.
Household budgets were tightened, with total household spending falling by 4.2% in the three months to September 1979, the largest quarterly drop seen in the data to this point.
By spring 1980 inflation rose to around 15%, and by the following year more than one in 10 adults were unemployed. “This was a 50 year high in the unemployment rate of 10.2%,” according to the ONS.
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GDP fell for five successive quarters between 1980 and 1981.
1984 to 1985: Miners' strike
The 1984-85 miners’ strike lasted a whole year, with a key battle at Orgreave. Over 1,400 miners were arrested, 500 men convicted and 200 sacked for protesting against the pit closures.
The 12-month-long miners' strike resulted in a loss of production, and the closure of collieries since the 1960s led to mass unemployment.
At the height of the strikes, 142,000 miners were involved, and an estimated 27 million person-days of work were lost throughout the dispute.
The widespread loss of workers in the mining industry became structural unemployment. This in turn became long-term unemployment, leading to increasing poverty and inequality.
By the second quarter of 1984 unemployment had reached record levels at 11.9%, having risen consistently during the early part of the decade.
The cost of borrowing was rising once more, with the bank rate rising by more than four percentage points between November 1984 and January 1985, to just under 14%.
1990s: Black Wednesday
In September 1992 the UK government failed to prop up the value of the pound amid a selling attack from investors.
George Soros's Quantum Fund led a field of speculators who borrowed UK gilts only to sell them and buy them back later at cheaper prices. They repeated the trick every few minutes, making a profit each time. Soros said later he had made £1bn from selling sterling he didn't own.
By mid-morning the selling was so intense that Bank of England officials were buying £2bn of sterling an hour.
Black Wednesday, as it became known, wiped billions of pounds from the stock market and is estimated to have cost the UK Treasury £3.3bn as the country crashed out of the Exchange Rate Mechanism.
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The period of stability after this point has been dubbed the Great Moderation. The UK experienced almost 16 consecutive years of economic growth after the 1991 downturn; this was the longest continued expansion on record.
2008: Global financial crisis
In July 2008 the global banking system imploded, leading to the most famous and longest lasting recession to hit the UK
The "Great Recession" of 2008 was sparked by rising energy prices and the collapse of the housing market.
It lasted for five financial quarters and was the longest recession on record since the Second World War.
Overnight, household names went bankrupt — from Lehman Brothers to the Royal Bank of Scotland, which had to be bailed out by the UK government.
“Firm closures and widespread job losses caused the rate of unemployment to rise from 5.2% in 2008 to a high of 8.4% in 2011.
“Redundancy levels rose by 160% to 311,949 between January to March 2008 and February to April 2009. The number of people claiming unemployment benefits more than doubled between January 2008 and October 2009, reaching the highest level in over 12 years.
“Household expenditure fell by 4.8% from late 2007 to mid-2009 as incomes stagnated,” the ONS said.
The crisis caused a huge fall in average UK house prices, which dropped by more than 15% in the year to February 2009.
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GDP fell by 5.9% from peak to trough in this period and it took more than five years for GDP to recover, and nearly eight years for GDP per head to recover.
In the wake of the financial crash interest rates were cut to historic lows in an effort to stimulate the economy.
Between October 2008 and March 2009, the Bank of England base rate was lowered seven times, reducing the cost of borrowing from 5.0% to 0.5%.
Rates lingered below 1% for the following 13 years, only rising back to this level in May 2022 as the Bank of England tries to rein in record high inflation.
2016 to present: Brexit
The UK was always an awkward member of the EU. It joined late, complained while it was there and in December 2020 became the only country ever to leave.
The ONS said isolating the economic impacts of Brexit is difficult because it has overlapped with the COVID-19 pandemic, global supply chain disruption and energy and food price shocks. But it did point to an initial drop in trade with the bloc.
2019 to present: The COVID-19 pandemic and the Ukraine war
The UK’s economy suffered the worst recession in 100 years as the initial wave of COVID-19 and late entry into a tight lockdown caused a sudden stop in activity across the country.
UK GDP plunged by 19.8% in the second quarter of 2020, and by 9.4% for the year as a whole.
Household spending fell by over 20% over this period, the largest quarterly contraction on record, which was driven by falls in spending on restaurants, hotels, transport, and recreation.
The furlough scheme, affecting a total of 11.6 million jobs, significantly curbed the labour market impact, with the unemployment rate rising from 3.8% at the end of 2019 to 5.2% by the end of 2020.
As restrictions were lifted, GDP largely recovered by 17.6% in the third quarter of 2020 — between July and September.
Household spending rose by 19.6% in the third quarter of 2020, with higher spending in restaurants, hotels and on transport. In the year to June 2021, average house prices rose 13.5%.
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Borrowing costs were cut to historic lows as the bank rate was lowered to 0.1% in March 2020. In the year to June 2021 average house prices rose by 13.5%, helped by the waiving of stamp duty on house purchases up to £500,000.
After a period of historic lows, CPIH inflation rose from 0.5% in August 2020 to 7.8% by April 2022, precipitated by rising fuel costs and the war in Ukraine.
