Major hangover of the Thatcher miracle: Britain's longest post-war recession is set to become longer still, writes Christopher Huhne

YESTERDAY'S drop in manufacturing output raises the spectre of continued economic decline. Far from bouncing along some imaginary bottom, British factories are facing an uncomfortable lurch down some unpleasantly steep stairs.

With home sales stagnating, exports dropping and investment being cut back, companies have little option but to attack costs, first among which is labour. The wave of redundancies sweeping through business is the result. Today's unemployment figures are expected to show a further rise of 40,000, bringing the total increase since March 1990 to nearly 1.3 million.

What has gone wrong? Businesses which had hoped for a post-election recovery found that their products were merely accumulating on the storeroom shelves. As managers came back from holiday, they confronted the need to cut output sharply back into line with sales. For a time, they even have to cut production more sharply so that they can reduce stocks. Such is the viciousness of the stock cycle.

But businesses' attempts to control stocks is only a part of the story. There has also been a new downturn in Britain's main export markets. German industrial production began dropping in March. France, like much of the continent, is in recession. In the United States, President George Bush looks like losing the election because of the recovery which never was. British export volume fell by 3 per cent in August, and there may be worse to come.

The root cause of Europe's malaise was the supercharging of the German economy brought on by unification. Faced by soaring public spending, and demand which outstripped supply, the Bundesbank ratcheted up interest rates to their highest levels in 30 years. The rest of Europe, tied to the mark by the exchange rate mechanism, applied a monetary lash ill-suited to their increasingly sick economies.

But Britain's economy also faces fundamental problems which would have meant a long-drawn out and painful recession even if the world outside were buoyant. The high debts incurred during the property boom, particularly in London and the South-east, have come back to haunt us.

Interest rates are lower than in France or in Germany, but our interest payments take twice as much of household incomes as they do in France, and five times as much as in Germany. The fabled 'Thatcher miracle' was the pleasant sensation which occurs when you spend more than you earn. The Major hangover is when you have to repay the money - and spend less than your income.

What can be done? Another economy with similar debt problems - the United States - shows that there are few rapid solutions. US interest rates have been cut to just 3 per cent to kickstart the economy, and the dollar has dropped by a fifth, but to no avail.

There is now a clamour for a similar strategy in Britain, but the dangers are far greater. Any devaluation raises import prices. But because we are a medium-sized economy which imports far more than the US, devaluation feeds through more rapidly into inflation. If the markets were to take fright, pushing the pound into free-fall, interest rates might end up even higher than they are now.

The most important lesson is surely not to worsen the recession by tightening any form of economic policy: big public spending cuts, redundancies in public sector industries like coal, and tax increases, merely dig a deeper hole. Public works like the Jubilee line and the East-West crossrail would be cheap because building prices are a fifth below their peak in 1989.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
A monstrous idea? Body transplants might no longer be science fiction
Science An Italian neurosurgeon believes so - and it's not quite as implausible as it sounds, says Steve Connor
Demba Ba (right) celebrates after Besiktas win on penalties
footballThere was no happy return to the Ataturk Stadium, where the Reds famously won Champions League
Arts and Entertainment
Natural beauty: Aidan Turner stars in the new series of Poldark
arts + ents
Mia Freedman, editorial director of the Mamamia website, reads out a tweet she was sent.
arts + ents
Have you tried new the Independent Digital Edition apps?
ebooksA special investigation by Andy McSmith
Arts and Entertainment
The write stuff: masters of story-telling James Joyce, left, and Thomas Hardy
arts + ents...begging to differ, John Walsh can't even begin to number the ways
Jose Mourinho on Sky Sports
footballEXCLUSIVE COLUMN Paul Scholes: It was not a leg-breaking tackle, as the Chelsea manager had claimed
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper

£23000 - £26000 per annum: Recruitment Genius: This small, friendly, proactive...

Recruitment Genius: Photographic Event Crew

£14500 - £22800 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Software Developers - .NET / ASP.NET / WebAPI / JavaScript

Negotiable: Recruitment Genius: A Software Developer is required to join a lea...

Austen Lloyd: Corporate Tax Solicitor - City

Excellent Salary: Austen Lloyd: A first rate opportunity to join a top ranking...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower