The worst in 60 years?

Today, the Chancellor told the Guardian that Britain is facing "arguably the worst" economic downturn in 60 years.

Could Darling be onto something? Or is he getting carried away with his own apocalyptic language? We have had a few nasty turns during that time. If today's slowodown takes the title of the worst in 60 years, it has three competitors to overtake.

The oil shock - 1974-5

This was the downturn that set the mood for a decade. Inflation hit 25 percent, unemployment doubled, and the housing market crashed.

The country hit rock-bottom when Heath put the country on a three day week. The coal miners were looking for more money and he didn't want to pay. He called an election on the bogus premise that he wanted to sort out who ran the country. The electorate decided that it was the Miners. Heath was dumped and and the "miners friend" Harold Wilson took over Downing Street.

The Thatcher recession 1980-82

This will be a tough one to beat. Thatcher wanted to kill off double digit inflation. She tightened things up. She raised interest rates and tried to cut public expenditure.

However, she initially suffered from a credibility problem. Wage setters didn't believe her and kept settling for huge increases. Higher wages made firms uncompetitive and the UK suffered from the largest employment shake-out since the 1930s. The situation wasn't helped by a sudden appreciation of sterling, which made UK exports uncompetitive. The end result was three million unemployed and a sizable contraction of GDP.

The West Midlands, the heart of UK manufacturing, was devastated. As one commentator said, "Thatcher did more damage to the West Midlands than the Luftwaffe."

Trapped in the ERM 1990-92

This downturn was in some respects a re-run of the Thatcher recession. By 1989, inflation was running out of control and somewhat belatedly, the Conservatives realized that something had to be done. Interest rates increased, killing off the 1980s housing bubble.

However, the downturn was compounded by what now seems the insane decision to enter the European exchange rate mechanism, which anchored sterling to the DM. After German unification, the Bundesbank raised interest rates, and the UK had to follow. As the economy nose-dived, unemployment hit 3 million, and the government ran up huge deficits.

Major finally threw in the towel in summer 1992, pulling out of the ERM. The economy began to recover, but the UK electorate haven't forgiven the Tories for the mess.

Focus on fiscal management, forget the housing crash

These are some tough acts to follow.

However, if the UK economy is about to hit the worst slowdown in 60 years, then New Labour's current economic strategy is horribly misaligned. The government accounts are already in bad shape and they will get worse if the economy slides into a major recession. Unemployment is going to increase, leading to higher benefit expenditures, and larger fiscal deficits. So if the government accounts are about to deteriorate, then why is Darling proposing an expensive taxpayer bailout of the housing market?

Darling needs to prioritize; the housing market is beyond saving, but he can do something now to keep some order in the goverment accounts as things start to deteriorate.