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Credit crunch 'to hit UK growth' Credit crunch 'to hit UK growth'
(about 17 hours later)
UK economic growth will slow next year as a result of the credit crunch, but it will also have positive effects, according to an influential forecast.UK economic growth will slow next year as a result of the credit crunch, but it will also have positive effects, according to an influential forecast.
Ernst & Young's Item Club cut its 2008 growth prediction to 2.1% from 2.5%.Ernst & Young's Item Club cut its 2008 growth prediction to 2.1% from 2.5%.
But it also sees it as an opportunity to rebalance the economy, which has come to rely on low interest rates.But it also sees it as an opportunity to rebalance the economy, which has come to rely on low interest rates.
The credit crunch refers to the way banks tightened up their lending practices when questions arose about the value of some debt.The credit crunch refers to the way banks tightened up their lending practices when questions arose about the value of some debt.
Record defaults on sub-prime mortgages in the US left many banks uncertain about the value of some of the debt they held and also made them unsure about the financial position of other banks. Record defaults on sub-prime mortgages in the US left many banks uncertain about the value of some of the debt they held.
It also made them unsure about the financial position of other banks.
It meant that they were both uncertain about how much money they had available to lend out and unsure about whom it was safe to lend to.It meant that they were both uncertain about how much money they had available to lend out and unsure about whom it was safe to lend to.
Real victimsReal victims
The credit crunch is also expected to raise the interest rates that banks offer to mortgage customers, but the Item Club does not expect that to lead to a serious correction in house prices.The credit crunch is also expected to raise the interest rates that banks offer to mortgage customers, but the Item Club does not expect that to lead to a serious correction in house prices.
The real victims will be among formerly fast-growing parts of the financial sector, which may be a good thing, according to the Item Club's Peter Spencer.The real victims will be among formerly fast-growing parts of the financial sector, which may be a good thing, according to the Item Club's Peter Spencer.
"This is a very timely tightening, targeting parts of the financial sector that were growing too fast and were too dependent on cheap credit."This is a very timely tightening, targeting parts of the financial sector that were growing too fast and were too dependent on cheap credit.
"Having to reverse gear may not be such a bad thing," he said."Having to reverse gear may not be such a bad thing," he said.
The report cites over-exposed hedge funds, private equity businesses and property buyers who have borrowed a very high proportion of the value of their properties as groups most likely to be hit.The report cites over-exposed hedge funds, private equity businesses and property buyers who have borrowed a very high proportion of the value of their properties as groups most likely to be hit.
It also points out that the Treasury will be hit by falling tax revenues from the City.It also points out that the Treasury will be hit by falling tax revenues from the City.
Earlier this month, the government lowered its own growth forecast for next year from between 2.5% and 3.0% to between 2.0% and 2.5%.Earlier this month, the government lowered its own growth forecast for next year from between 2.5% and 3.0% to between 2.0% and 2.5%.