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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. | |
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 victims | Real 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%. |
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