Briefing Paper: Why has the economy recovered?1

Abstract

By the end of last year GDP (though strike affected) was 9 per cent higher than in the first half of 1981, an annual growth rate of 2.5 per cent. In this Briefing Paper we seek to explain the recovery from the recession. We conclude that much of the recovery represents a natural response of the economy after the oil and price shocks of 1979‐80. The recovery occurred in spite of the deflationary Budget of 1981 and the sharp rise in interest rates in the autumn of 1981. Since 1981 fiscal policy has been stable, whereas the original intention was to tighten fiscal policy progressively in subsequent years. This stability and the fall in the inflation rate that accompanied it allowed growth to resume. We believe that the upturn would have been rather weaker (though inflation would have been lower) if the progressive tightening of the original Medium‐ Term Financial Strategy had been adhered to.