Suez Crisis to COVID pandemic: How economic shocks have shaped history

·Finance Reporter, Yahoo Finance UK
·10 min read
Economic shock: 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. Photo: Olga Maltseva/AFP via GettyTOPSHOT - Russian servicemen stand guard at the destroyed part of the Ilyich Iron and Steel Works in Ukraine's port city of Mariupol on May 18, 2022, amid the ongoing Russian military action in Ukraine. (Photo by Olga MALTSEVA / AFP) (Photo by OLGA MALTSEVA/AFP via Getty Images)
Economic shock: 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. Photo: Olga Maltseva/AFP via Getty

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.

Economic shocks Chart: ONS
Economic shocks Chart: ONS

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.

Inflation rose sharply in the 1970s before falling back in the 1980s. Chart: ONS
Inflation rose sharply in the 1970s before falling back in the 1980s. Chart: ONS

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.

An unidentified woman pours gasoline into her car from a can July 1979
Fuel shortage following cuts in oil production implemented by the Arab crude oil producing countries left UK drivers struggling to find petrol. Photo: Getty

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.

Mr Alan Fisher (white mac), general secretart of NUPE, and Mr David Basnett (centre, tallest), general secretary of the General and Municipal Workers' Union, at the head of a mass march to Parliament where public services workers planned to lobby MPs as part of a
Alan Fisher (white mac), general secretary of NUPE, and David Basnett (centre, tallest), general secretary of the General and Municipal Workers' Union, at the head of a mass march to Parliament where public services workers planned to lobby MPs as part of a 'Day of Action' against government pay policy. Photo: PA

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.

Read more: Cost of living crisis: Grocery prices rise at fastest rate since 2009

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.

Embargoed to 0001 Monday March 3 EDITORS NOTE IMAGE CONVERTED TO BLACK AND WHITE Alan Cummings, 66-year-old former NUM lodge secretary, looks at photographs from the miners' strike as at Easington Colliery, County Durham, miners who broke the strike and
Alan Cummings, 66-year-old former NUM lodge secretary, looks at photographs from the miners' strike as at Easington Colliery, County Durham. Photo: PA

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.

Productivity fell during the strikes of the 1970s and 1980s Chart: ONS
Productivity fell during the strikes of the 1970s and 1980s Chart: ONS

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.

STERLING CRISIS 1992: Sterling dealers on the trading floor of Nat West's foreign exchange department, Bishopsgate, City of London, as the Pound still remains in the danger zone on Europe's exchange rate mechanism.   (Photo by Jim James - PA Images/PA Images via Getty Images)
Sterling dealers on the trading floor of Nat West's foreign exchange department during Black Wednesday. Photo: Getty

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.

A selection of front pages of British newspapers is pictured in London on October 13, 2008. Britain's government is to invest up to 37 billion pounds (47 billion euros, 64 billion US dollars) in ailing British banks Royal Bank of Scotland (RBS), HBoS and Lloyds TSB, it said on October 13. As shares in London soared on the news, Finance Minister Alistair Darling said he hoped other countries caught in the global financial crisis would use Britain's bank bailout plan as a model. AFP PHOTO/ALESSANDRO ABBONIZIO (Photo credit should read Alessandro Abbonizio/AFP via Getty Images)
The UK government had to help ailing British banks Royal Bank of Scotland (RBS), HBoS and Lloyds TSB. Photo: Alessandro Abbonizio/AFP via Getty

“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%.

Interest rates were cut to historic lows between 2008 and 2009. Chart: ONS
Interest rates were cut to historic lows between 2008 and 2009. Chart: ONS

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.

A person writes a message on The National Covid Memorial Wall, on national day of reflection to mark the two year anniversary of the United Kingdom going into national lockdown, in London, Britain, March 23, 2022. REUTERS/Peter Cziborra
A person writes a message on The National Covid Memorial Wall, on national day of reflection to mark the two year anniversary of the UK going into national lockdown. Photo: Peter Cziborra/Reuters

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%.

Read more: Bank of England prepared to raise interest rates again, says Bailey

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.

Watch: How does inflation affect interest rates?

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