International credit crunch approaches maximum impact stage

The international credit crunch is dominating business and consumer sentiment worldwide. The UK is more vulnerable to negative international developments given that overseas trade represents a high percentage of the UK total economy (over 25%). The principal impact of the international credit crunch has been on the cost and availability of credit. Whilst the US $700 billion package will provide an essential respite, the multiplier impact of this year’s events will probably result in two consecutive quarters of negative UK growth in the second half of 2008- a technical recession. The impact of the downturn has been most pronounced in the housing market, in respect of both mortgage lending and residential housebuilding. The outlook for other sectors of the economy is less negative - with retail sales still in positive territory. We expect UK economic growth in the third and fourth quarters of 2008 will be in the region of minus 0.3% per quarter. Thereafter, the economy is predicted to slowly gather momentum in the first half of 2009, followed by a return to trend growth (0.7% per quarter) in the second half of 2009. This forecast is based on a view that (1) the Chancellor will announce a major fiscal stimulus toward the end of this month; (2) that the MPC reduces base rate to 4.50% or lower before year end and (3) that the international credit crunch gradually eases in first half 2009 under the weight of co-ordinated central bank liquidity injections. The risk to forecast is therefore significant, since any policy errors or omissions raise the risk of a more prolonged downturn in the economy.

(This article represents our view only and no action should be taken without expert advice. Please call us if advice is required).