The 1930s are the benchmark when it comes to lost decades. There are recessions and deep recessions, but then there is the Great Depression. In terms of sustained misery, nothing remotely comes close to the 10-year period that followed the Wall Street Crash of 1929.

Yet in one respect – growth in living standards – the performance of the UK since the financial crisis began in 2007 has been worse than it was in the era that included coming off the Gold Standard, the formation of the National Government and the Jarrow March.

Data from the House of Commons library obtained by the Labour MP Liam Byrne illustrates the point. In both cases, there was a similar-sized contraction of the economy lasting two years, but the subsequent recovery in the 1930s was faster than it has been since 2007.

That is true whether measured by the overall size of the economy or when adjusted for the size of the population. The latter – gross domestic product (GDP) per head – is a more meaningful measure because it shows whether people are actually getting better off.

Q&A What is gross domestic product (GDP)? Show Hide Gross domestic product (GDP) measures the total value of activity in the economy over a given period of time. Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction are considered to be a recession. GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government. Several key activities are not counted, such as unpaid work in the home. The ONS uses three measures that should, in theory, add up to the same number. • The value of all goods and services produced – known as the output or production measure.

• The value of the income generated from company profits and wages – known as the income measure.

• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure. Economists are concerned with the real rate of change of GDP, which accounts for how the economy is performing after inflation. Britain's government statistics body, the Office for National Statistics, produces GDP figures on a monthly basis about six weeks after the end of the month. It compares the change in GDP month on month, as well as over a three-month period. The ONS warns that changes on the month can prove volatile, preferring to assess economic performance over a three-month period as the wider period can smooth over irregularities. The most closely watched GDP figures are for the four quarters of the year; for the three months to March, June, September and December. The figures are usually revised in subsequent months as more data from businesses and the government becomes available.

The ONS also calculates the size of the UK economy relative to the number of people living here. GDP per capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. Richard Partington

Here the data is absolutely clear. By 1938, GDP for 20- to 64-year-olds was just over 10% higher than it had been in 1929, while in 2016 living standards for the same group were 4.6% higher.

To be fair, this is not quite the whole picture. Despite the stronger growth in the 1930s it took longer for the dole queues to shorten. The unemployment rate was still more than 10% by 1938 compared to less than half that today. What’s more, one reason Britain had a relatively shallow recession in the early 1930s was that the economy had stuttered its way through the 1920s. The past 20 years, by contrast, are a case of feast then famine.

Facebook Twitter Pinterest The Occupy protest camp in Finsbury Square, in the City of London, in 2012. Photograph: Peter Macdiarmid/Getty Images

Finally, it is worth pointing out that living standards are far higher today than they were in 1930s and that one group – pensioners – has continued to get better off. All that said, for working age adults the lost decade since 2007 has been the equivalent of a Mark II Great Depression.

Four interlocking factors led to the recovery of the economy in the 1930s. Firstly, Britain was able to devalue the pound after coming off the Gold Standard in 1931. Secondly, interest rates came down from 6% to 2% within a year and were left there until the second world war broke out. Thirdly, the National Government abandoned free trade in favour of protectionism, reinforcing the competitive advantage from a cheaper currency. Finally, low interest rates stimulated a private housebuilding boom. In the four years from 1933 to 1936, the economy expanded by 4.5% a year on average.

The recent recovery has been much more muted even though some of the factors that helped the economy in the 1930s have again been in evidence. Between the middle of 2007 and early 2009 there was a 30% devaluation of the pound and the Bank of England cut official interest rates from 5% to 0.25%. Admittedly, there was no attempt to resort to protectionism but fiscal policy – taxes and public spending – was more restrictive in the early 1930s than during the recent financial crisis.

One obvious difference between the two periods is that in the 1930s low interest rates prompted a big increase in housebuilding – just under 300,000 a year by mid-decade. In comparison, over the past decade low interest rates have led to a big increase in house prices.

Facebook Twitter Pinterest Low interest rates in the 1930s sparked a building boom whereas low rates over the past 10 years have just pushed up prices. Photograph: Facundo Arrizabalaga/EPA

Another is that the UK financial sector was unimpaired by the Great Depression. No bank or building society failed and that underlying resilience ensured that there was a ready flow of funds to finance the building of the suburbs.

But the manufacturing sector recovered a lot more quickly in the 1930s and had returned to its pre-slump trend by 1937. It took advantage of the benign macro-economic backdrop, with sharp increases in both output and productivity as sectors such as production of motor vehicles prospered. And because manufacturing represented a far bigger share of the economy 80 years ago, the boost to economy-wide productivity was marked.

The contrast with the post-2007 period is stark. Despite a better performance over the past year or so, manufacturing output is still below where it was when the recession began and productivity growth has been extremely modest. And that matters, because manufacturing productivity in the decades leading up to the crisis was growing twice as fast as productivity for the whole economy.



That trend is not particularly surprising because there tends to be more automation in the manufacturing sector, while the service sector is more labour intensive. But it does mean that as the economy becomes more heavily weighted towards services – around 80% of GDP currently – productivity improvements are harder to chisel out.

A weak pound is no tonic for UK's long-term economic recovery Read more

Seen in a slightly different way, the lack of recovery in production has left the economy dependent on consumption, where growth has slowed due to rising debt and higher import prices as a result of the post-Brexit-referendum fall in the value of the pound. Annual productivity growth in the past five years has averaged 0.2% and the Office for Budget Responsibility says it has run out of reasons for expecting a return to its pre-recession trend of just over 2%. A significant downgrade to the long-term forecast in next month’s budget is now inevitable.

In his insider’s view of the decline of the UK engineering industry, Tom Brown notes how poor management, bad industrial relations, a reluctance to invest, a failure to focus on the needs of customers, City short-termism and wildly gyrating macro-economic policies have all resulted in Britain’s manufacturing sector shrinking much more quickly than those of other rich western countries. Brown is rightly dismissive of the idea that low cost competition from China means Britain should resign itself to a post-industrial future, noting that Germany’s manufacturing is twice as big as the UK’s as a share of GDP, and generates a whopping trade surplus.



Britain has pockets of excellence but they float on a sea of mediocrity. London is Europe’s financial hub but the UK has one of the lowest investment rates in the G7. As the Institute for Public Policy Research noted in a recent report, Britain has an economic muddle rather than an economic model.



Byrne, who chairs the all-party parliamentary group on inclusive growth, said of the comparison with the 1930s: “These terrible figures underline one profound point: Britain’s economic model is simply incapable of ‘bouncing’ our economy back to trend. The conclusion is inescapable: Our economic model needs to change.”



It’s hard to disagree. The shock of the 1930s led to a radical economic re-think; the shock of 2007-09 did not. Economic failure and political alienation are the consequences.