Early 1990s recession
The early 1990s recession describes the period of economic downturn affecting much of the Western world in the early 1990s, believed to be caused by restrictive monetary policy enacted by central banks primarily in response to inflation concerns, the loss of consumer and business confidence as a result of the 1990 oil price shock, the end of the Cold War and the subsequent decrease in defense spending, the savings and loan crisis and a slump in office construction resulting from overbuilding during the 1980s. The global GDP growth returned to normal by 1994. The impacts of the recession included the resignation of Canadian prime minister Brian Mulroney, reduction of active companies by 15% and unemployment up to nearly 20% in Finland, civil disturbances in the United Kingdom and the growth of discount stores in the United States and beyond.
Primary factors believed to have led to the recession include the following: restrictive monetary policy enacted by central banks, primarily in response to inflation concerns, the loss of consumer and business confidence as a result of the 1990 oil price shock, the end of the Cold War and the subsequent decrease in defense spending, the savings and loan crisis and a slump in office construction resulting from overbuilding during the 1980s. The US economy returned to 1980s level growth by 1993 and global GDP growth by 1994.
North America
Canada
Canada's economy is considered to have been in recession for two full years in the early 1990s, specifically from April 1990 to April 1992. Canada's recession began about four months before that of the US, and was deeper, likely because of higher inflationary pressures in Canada, which prompted the Bank of Canada to raise interest rates to levels 5-6 percentage points higher than the corresponding rates in the US by early 1990.Canada's economy began to weaken in the second quarter of 1989 as sharp cutbacks in manufacturing output reduced real GDP growth to about 0.3% for each of the last three quarters of the year. Despite GDP growth being minimal, employment growth remained moderate throughout 1989 and there was a solid growth spurt in the first quarter of 1990. In April 1990, economic activity and employment both began substantial declines with the largest drops in real GDP, 1.2%, and employment, 1.1%, occurring in the first quarter of 1991. Both real GDP and employment bounced back in the second quarter of 1991, but then for a full year there was virtually no change in real GDP while employment levels continued to drop as most industries continued to cut output. Technically, the moderate expansion in the second quarter of 1991 would qualify the contractions from April 1990 to March 1991 and July 1991 to April 1992 as two separate recessions, but the 1991 second quarter expansion was likely the result of pent up demand from the Gulf War and the introduction of the federal Goods and Services Tax early in the year severely suppressing consumer spending in the first quarter.
Overall real GDP growth for 1989 was 2.3%, for 1990, 0.16%, for 1991, -2.09%, and for 1992, 0.90% before increasing to 2.66% in 1993. The unemployment rate rose from 7.5% in 1989, to 10.3% in 1990, 10.3% in 1991, 11.2% in 1992, and 11.4% in 1993 before dropping to 10.3% in 1994.
The inflation rate in Canada had remained in the 4% range between 1984 and 1988, but began to rise again in 1989, averaging 7.5% that year. Gordon Thiesen, asserted in 2001 when he was the Bank of Canada governor, that inflationary pressures in Canada were partly fueled by Canadians having had a greater "inflation psychology" than Americans, that is a higher propensity to spend now in the belief the price for the same product will be substantially higher in short period of time. To reduce inflation, the Bank of Canada raised it prime rate from 10% in 1986 and 1987, to 12.25% at the start of 1989, peaking at 14.75% in June 1990, thereby prompting Canadians to reduce spending, reduce borrowing and begin saving sooner and more greatly than Americans. Particularly hard hit were Canada's real estate markets, the building industry, especially factory construction, and consumer confidence.
Then in February 1991, the Bank of Canada and the Department of Finance announced their monetary policy would be governed by formal inflation targets, with a target of 3% for 1992. Inflation was contained to 4.8% in 1990, 5.6% in 1991 and then decreased to 1.5% in 1992 and 1.9 in 1993, well below the target of 3%. This suggests the Bank of Canada's restrictive monetary policy overshot its target suppressing GDP and employment growth in 1992 and 1993 in what would normally have been an economic recovery period. In fact, complex macro-economic modelling undertaken estimates that "excessive monetary restraint" of the Bank of Canada reduced real GDP growth by 1.5 percentage points in 1990, 2.9 percentage points in 1991 and 4.0 percentage points in 1993.
Another key cause of Canada's recession were several tax increases instituted by the federal government between 1989 and 1991. These increases related to sales, excise and payroll taxes were modelled to have reduced real GDP growth by 1.6, 2.4 and 5.1 percentage points, respectively, in 1990, 1991 and 1992, although if these tax increases had not been implemented the federal governments national debt would have increased a significant amount. A third, less important factor in Canada's recession was the weakness of the US economy at the time, which was calculated to have had the effect of reducing Canada's economic growth by.6, 2.2 and 1.1 percentage points in 1990, 1991 and 1992.
Another reason for the recession being deeper and longer in Canada was the high value of the Canadian dollar, as high as 86-cents American in 1991, which made Canada's export manufactured goods, such as automotive parts, textiles and intermediate industrial goods and materials, uncompetitive in international markets. Combined with Canada's manufacturing productivity at the time being among the lowest in the G7 and the removal of certain protective tariffs through the 1989 Canada-US Free Trade Agreement, this caused substantial job losses in the manufacturing sector with a significant number of manufacturers closing down or moving to the US, Mexico or the Caribbean.
C.D, Howe Intitute's Business Cycle Council classifies Canada's recession according to their severity, with Category 4 recessions being the second highest after Category 5, which is a depression. It defines Category 4 recessions as having substantial declines in real GDP and employment for a year or longer. The early 1990s recession in Canada is classified as a Category 4 recession, the same category as the early 1980s recession.
Notably, the early 1990s recession did not have as deep a contraction as the early 1980s recession, but was of longer duration as it had four years of less than 2.3% growth in real GDP, while the early 1980s recession only had two years of less than 2.3% growth, and only the early 1990s recession actually saw a decrease in GDP per capita, that being by $29 in 1991. Both recessions had high unemployment after the recessionary period had officially ended with unemployment rates of 12% and 11.4%, in 1983 and 1993, respectively.
Europe
Finland
Finland underwent severe economic depression in 1990–93. Badly managed financial deregulation of the 1980s, in particular removal of bank borrowing controls and liberation of foreign borrowing, combined with strong currency and a fixed exchange rate policy led to a foreign debt financed boom. Bank borrowing increased at its peak over 100% a year and asset prices skyrocketed. The collapse of the Soviet Union in 1991 led to a 70% drop in trade with Russia and eventually Finland was forced to devaluate, which increased the private sector's foreign currency denominated debt burden. At the same time authorities tightened bank supervision and prudential regulation, lending dropped by 25% and asset prices halved. Combined with raising savings rate and worldwide economic troubles, this led to a sharp drop of aggregate demand and a wave of bankruptcies. Credit losses mounted and a banking crisis inevitability followed. The number of companies went down by 15%, real GDP contracted about 14% and unemployment rose from 3% to nearly 20% in four years.Recovery has been based on exports, after currency devaluation of 40% and reviving world economy share of exports as percentage of GDP has risen from 20% to 45%, and Finland has been running consistent current account surpluses. Despite this impressive performance and strong growth mass unemployment has remained a problem.
United Kingdom
Despite several major economies showing quarterly detraction during 1989, the British economy continued to grow until the third quarter of 1990. Economic growth was not re-established until early 1993, with the end of the recession being officially declared on 26 April that year, but the Conservative government which had been in power continuously since 1979 managed to achieve re-election in April 1992 after the replacement of long-serving Margaret Thatcher with John Major as prime minister in November 1990 helped fend off a strong challenge from Neil Kinnock and Labour.After the end of the recession, the British economy enjoyed a record run of unbroken economic growth lasting more than 15 years, until the economy lurched back into recession during 2008. The latter economic downturn was even worse than that of the early 1990s.