I am, of course, aware of the concern to which the hon. Gentleman refers. It is felt in a number of countries, but I think that it is felt more seriously in other countries than it is here. I do not think that we face the prospect of a credit crunch of the kind that is sometimes talked about in the United States. The Bank of England, however, monitors developments of the kind that the hon. Gentleman has in mind very carefully, and I shall take on board what he has said.
When the economy is in recession, it is always difficult to see where the upturn is coming from. Those who plan for the future often work on the assumption that the next six months will be just like the last; but we know that recession always come to an end, and that the present one will be no exception. Indeed, we can already begin to discern some of the forces that will lead to recovery. That is why the vast majority of independent forecasters are expecting a return to growth later this year.
It is important to remember that the recession comes after a sustained period of growth which has greatly strengthened companies and their finances. The current downturn follows a cumulative growth in output between 1981 and 1989 of 28 per cent. That is a lot of extra output to set against a fall currently predicted by some independent forecasters of around 1 per cent. or so. A reversal of that magnitude does not justify exaggerated and irresponsible talk of a depression; nor does the behaviour of the monetary aggregates. The growth of both broad and narrow money has fallen markedly in a way that is consistent with the reduction in inflation that we are expecting but does not suggest that the policy is excessively tight.
We are not alone. Three of the G7 countries are now in recession—the United States, Canada and ourselves. So are Australia and New Zealand. Although continental Europe is not in recession, it has not escaped the downturn. Industrial production has fallen in France, Italy, Belgium, Spain and Sweden—quite strongly in Sweden—within the past six months. Perhaps the right hon. and learned Member for Monklands, East (Mr. Smith), when he talks about the recession and blames it all on the Government, will give us his reasons for the fact that output is also falling in those other countries.
The truth is that much of what is happening is cyclical. The United Kingdom began its recovery from the last recession in 1982–83—sooner than the other countries—and our subsequent growth was particularly strong. It is not surprising, therefore, that we should also be the first to enter the period of downswing.
Other countries are at different stages of the cycle. For example—although we did not hear much about it from Opposition Members—four years ago the British economy was growing strongly and the French economy much less so; the German economy, in growth terms at least, was in the doldrums. Now, Britain is experiencing recession and output growth has recently slowed in France, while the German economy, buoyed up by reunification, is still enjoying strong growth.
Just how deep and how long the recession will be is difficult to predict at any time, but the present outlook is made more uncertain by the Gulf war. The world and United Kingdom economies were slowing down before the Gulf crisis began, but Iraq's invasion of Kuwait last August, and the consequent rise in oil prices, boosted fuel costs and inflation and dented business confidence. Many firms have responded by postponing spending decisions.
The uncertainties created by the Gulf crisis have added particularly to the problems of certain sectors of the economy. Airlines and the travel, hotel and entertainment businesses have lost valuable trade as tourists and other travellers have cancelled flights. The extent of the problem was shown this week, when British Airways announced several thousand redundancies.
Again, we must keep a sense of perspective. Over the past few years this country has seen a rise in employment—an increase by the third quarter of 1990 of 3·75 milion since 1983—greater than in any other EC country, and for 44 months we saw unemployment falling sharply. That was a remarkable development, greeted in stony silence by the Opposition. Because unemployment is an indicator that lags behind changes in output, the first six months in which activity was weakening saw only a gradual rise in the numbers out of work. That trend has only begun to accelerate over the last quarter, and we can expect unemployment to continue to climb for some time even after the recovery in output has begun.
Although that recovery has not yet begun, experience shows that it will start when we have made and are seen to have made decisive progress against inflation. That is what happened in 1981, when our position was far more difficult than it is today. Then we had to cope with very high inflation—following the Opposition's disastrous policies in Government—and a sharp loss of competitiveness, partly due to the strength of sterling following the United Kingdom's emergence as a major oil producer. In recent months, the rise in inflation has been much less severe. Underlying inflation, at its peak in 1990, reached 8·4 per cent. compared with 20·7 per cent. in 1980.
A new problem that we have encountered this time round has been the adjustment of the economy to very high levels of private sector debt built up during the second half of the 1980s. Inevitably the strain is being felt by those individuals and companies who have taken on the highest levels of debt. For example, some service sector firms borrowed heavily in the 1980s and are therefore among those who have felt the effects of high interest rates most keenly.
The onset of recession started to make the headlines at about the time we joined the exchange rate mechanism and that has prompted many to blame the recession on our entry. But the ERM is not the source of the current recession: it is not a Pandora's box from which the downturn sprang. The downturn in the economy is the inevitable result of exessive demand and borrowing in 1987 and 1988, which it was necessary to curb. A period of weaker activity became essential to reduce inflationary pressures. If there was any mistake, it was that policy was not tight enough and that was far from the course urged upon us by the Opposition.