nature and causes of fluctuations in economic activity

Real national output does not rise or fall at a uniform rate. All countries experience recurrent business or trade cycles where the growth of production, real incomes and spending fluctuates.

The length and volatility of each cycle changes over time as economic conditions change and previously observed economic relationships evolve.

The annual growth of UK GDP between 1981 and 2001 is shown in the chart below. The data shows national output at constant prices or real GDP (a measure of the volume of production).

There have been two recessions in the last twenty-two years.

When real GDP expands, the economy is achieving growth or a recovery. An example of this was the consumer-led economic boom in the late 1980s when real GDP expanded by 4.5% in 1987 and 5.2% in 1988. The economy enjoyed another cyclical boom in 1997-98 – although the rate of growth was not as fast as a decade earlier, the peak year for growth was 1997 with real national output growing by 3.4%.

A technical recession occurs when real GDP falls for two or more successive quarters. But a recession can also be defined as a period when national output is persistently below trend or potential GDP.

The last recession in the UK occurred in the early 1990s. Recovery began in the autumn of 1992 and since then Britain has witnessed over a decade of continuous expansion – the longest period of growth for over forty years.

Even though the global economy suffered a synchronised downturn in 2001 and into 2002, the UK was the fastest growing country inside the Group of Seven (G7) nations in 2001 with growth of 1.9%. The forecast is that GDP will grow by around 1.6% in 2002, not a bad result given the weakness of the international economy.