Boom turns to bust as the yuppie years come to an end

One task of the financial section of a newspaper is to pick out the big forces influencing the economy before everyone else, to be - as the jargon of the markets would have it - ahead of the curve. As it happened the 18 months from November 1989 to June 1991 when I was editing these pages coincided with the first stage of the early 1990s recession. It saw the shift from slowing growth to something close to despair: the time when it seemed the recession would never end. So I suppose the first test is whether we, as a paper, were indeed ahead of the curve, whether we picked up the danger signals in time.

The honest answer is "not really". The tone of the paper's coverage at the end of 1989 was beginning to show some caution. But while we made it clear that the boom was over - "the end of the longest uninterrupted economic expansion since the Second World War" I wrote on 2 November 1989 - neither I nor my colleagues fully grasped quite how severe the recession would become. That same piece carried some warnings - "the boom ... is already ending more sharply" - and saw some dangers: "Will there be so much disruption over the next couple of years that growth in the 1990s will be even slower than it otherwise would have been?'' But we all failed to see how catastrophic that period would be.

This newspaper group also failed to see the consequences on its own business, for the 18 months neatly spanned the period of optimism which led to the launch of the Independent on Sunday and the grinding financial pressures which provoked its ensuing partial merger with the daily.

This was the end of what we now call the Lawson boom. Nigel Lawson had resigned as Chancellor at the end of October 1989, and a young John Major had just taken over. Mr Major's spell in the Treasury was unremarkable. He produced one Budget, in March 1990, which he called "a Budget for savers" and which introduced Tessas. But as we reported at the time, the budget did little to cool the still-overheated economy, or curb inflation. Our columnist Bill Robinson (who subsequently became adviser to Mr Major's successor, Norman Lamont) reckoned that the Chancellor was gambling and that if he was wrong there would be more pain to come.

Base rates were then at 15 per cent. As we moved through 1990 it gradually became clearer that the economy was slowing. But even in the autumn it was still not clear that recession was upon us. Once it was, and once inflation seemed to be falling, the right policy would have been to cut interest rates. But we could not do so. Since 1988 sterling had been informally tied to the German mark, and policy was directed at keeping it there. Just as in the late 1980s we had been unable to push rates up fast enough, now we were unable to cut them when it became clear that recession was the greater danger.

On the eve of the 1990 Tory party conference in October 1990, sterling was formally linked with the mark in the European Exchange Rate Mechanism (ERM). John Major, still at that stage Chancellor, did take 1 per cent off base rates to the general acclaim of his colleagues. But in the months that followed, as recession deepened, that was clearly not enough. As it happened, he did not have to face recession as Chancellor, for little more than a month after that conference, his elevation to prime minister had passed the job of Chancellor to Norman Lamont.

The Budget the following spring was altogether more sober. In November 1990 the Treasury was still forecasting some growth in 1991. By the following March the forecast was for minus 2 per cent. That Budget was technically neutral, with a rise in VAT to 17.5 per cent used to pay for the abolition of the poll tax. But a neutral Budget only made sense if it enabled interest rates to be cut sharply. That was not to happen for another 18 painful months, when sterling's departure from the ERM enabled the UK to take back control of its monetary policy.

By June 1991, the picture was bleak indeed. "Treasury gloom over enduring recession" ran our front-page headline and my commentary on the lack of any recovery in manufacturing started with the words "It is, alas, the same subject again," and ended with "sad, but true".

If we failed to predict the depth of the recession, we did however catch some of its social and financial consequences. Take corporate restructuring. We recognised the scale of the revolution sweeping across the business world and charted the effects on both companies and their employees. Early 1990 saw perhaps the most striking downsizing of any large corporation anywhere in the world: the savage job cuts at IBM. We noted the impact of foreign investment, particularly from Japan, in re-industrialising Britain, and as well as charting the continuing privatisation programme, we also started looking at the introduction of business management techniques in the public sector.

The paper was also cautious about the bullish stories put out by some sections of the business community. This was not just a reaction to high- profile entrepreneurs such as Asil Nadir or the late Robert Maxwell. We were also deeply sceptical of forecasts that the housing slump was over; we were very cautious about the state of the Japanese financial system. On the other hand we did not fall for the excessive gloom surrounding some other sectors. For example we recognised that companies which were deeply out of fashion, such as advertising agencies, would eventually recover, and we suggested that by the middle 1990s London commercial property might again become profitable.

But perhaps the most fascinating thing about looking back on that period is how equity markets coped with disastrous economic circumstances and not lose their collective head. In November 1989, when the boom still seemed in full swing, the FT-SE100 index was at 2,160, and the Dow at 2,646. Sterling was $1.58 (almost exactly where it is now) and DM2.90. Some 18 months later, when both the UK and the US were in recession, the Footsie had managed to pull up to 2,525 and the Dow to 2,995. Sterling in early June 1991 was already up to $1.69 and DM 2.96, and was to touch $2.00 in the following year. If there is a moral here, it is that, left to their own devices, markets can cope with switches from euphoria to despair. During that period at least, equities were correctly cautious about the boom and correctly optimistic about the eventual recovery. It was the currency markets - manipulated by politicians - that got things wrong.

Hamish McRae is now associate editor of the Independent.