The charts below update an earlier analysis comparing GDP performance in the current recession with the last three – 1974-75, 1979-81 and 1990-91. As before, the GDP measure adjusts for the impact of strikes, while the lower chart also includes Bank of England and Treasury forecasts, contained in the February Inflation Report and November Pre-Budget Report respectively.

GDP in the fourth quarter of 2008 was 2.1% below the peak level reached in the second quarter, according to current Office for National Statistics (ONS) estimates. This compares with a peak-to-trough fall in strike-adjusted GDP of 2.5% in 1990-91, 2.8% in 1974-75 and 6.2% in 1979-81.

As explained here, however, monthly ONS numbers for services and industrial output imply that GDP in December was 1.0% below the fourth-quarter average. In other words, even assuming no further fall in early 2009, first-quarter GDP will be 3.1% below the peak level of the second quarter of 2008. So the current downturn is already deeper than the 1974-75 and 1990-91 recessions.

The Bank of England central forecast, based on a constant 1% Bank rate, entails GDP bottoming in the second / third quarters at a level 3.8-3.9% below the peak, implying a further decline of 0.8% from the estimated December reading. It then embarks on a strong recovery, rising at an annualised rate of about 3.5% over the following six quarters.

Strike-adjusted GDP fell by 6.2% in the 1979-81 recession. This dismal performance, however, was partly a reaction to a 5.3% surge in GDP in the year preceding the peak. With no comparable boom leading up to the current downturn, the Bank of England’s forecast that the current recession will be less severe is defensible, though depends on an improvement in money and credit conditions.

The Treasury forecast looked optimistic even when it was published in November – see here – and has been rendered obsolete by the fourth-quarter GDP estimate. The April Budget will probably be based on a profile similar to the Bank’s latest forecast.

Monetary news has improved recently: nominal money expansion may be stabilising, real growth is reviving as inflation falls and the MPC is finally embracing necessary quantitative action. This supports the Bank of England’s forecast that the economy will trough by the third quarter, though GDP could decline by more than it projects in the interim. However, monetary growth would need to rise substantially to justify the Bank’s projection of a strong recovery from late 2009, particularly with fiscal policy set to tighten next year. On current information, an economic revival is more likely to follow the pattern of the early 1980s and early 1990s, when GDP growth averaged only 1-2% annualised in the six quarters following the recession trough.