UK Economy Could Be Down By 1% From Sub-Prime

The rate of growth in the UK economy could be down by as much as 1% over the next two years, as the credit crunch begins to take hold of the economy according to a report by Ernst & Young.

The report forecast that the impact of a credit crunch on the UK economy may be strong enough to detract from growth figures for the next two years, shedding as much as 1% off what could otherwise be strong growth.

Whilst the report suggested there is still a chance the crunch could remain within the banking and finance sector, there is still the possibility that it could begin to make its presence felt in terms of consumer spending and in the housing market, signalled by what was described as some ‘worrying signs’.

The credit crunch environment has emerged off the back of rising defaults and repossessions within the US economy tying up liquidity and making banks less willing to loan money to businesses and to each other.

Banks had heavily invested in the sub-prime lending sector, specifically tailoring mortgages to those with poor credit histories for a higher rate of interest. As general interest rates in the US gradually increased, the growing sub-prime sector became unable to afford repayments resulting in mortgage defaults and foreclosures.

As a consequence, banks across the world have adopted more hostile credit policies to both lenders and other banks, holding on to liquidity in order to keep their businesses afloat.

The situation has also seen lenders face serious financial difficulties in the US and now in the UK with Northern Rock, as well as across Europe and Japan.

Unfortunately, Ernst & Young report, the lack of available credit could significantly hamper growth and business investment over the medium term, seeing growth down over the next two years if the situation continues as at present.

Story link: UK Economy Could Be Down By 1% From Sub-Prime