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The credit crunch will continue to hit this year

Before last summer many people in the UK had never heard to term credit crunch, but now this has become a well known term that has become associated with financial doom and gloom.

The global credit crunch stemmed from default levels in the sub-prime mortgage sector in the United States, and the repercussions quickly too effect all across the globe, also heading across the Atlantic to the UK. Since around August of last year the financial world has had to make a number of changes in order to deal with the effects of the credit crunch, and experts state that the crunch is set to continue over this year.

The credit crunch has affected both industry and consumers and some say that things could get much worse before they start to get better. The crunch has affected everything from the growth of the economy and consumer confidence to access to finances for both businesses and consumers. Even banks and lenders are struggling when it comes to inter-bank lending, and this has seen credit conditions become far tighter in terms of lending to businesses or consumers.

Lenders have already stated that they will have to tighten up on lending even further in the first part of this year, having already cut back on lending last year. Consumers and businesses are finding it increasingly difficult to get finance as a result of this, and sub-prime consumers in particular have found themselves left out in the cold in terms of being able to access finance. This lack of accessibility tom finance has affected both consumer confidence and consumer affordability, which means that spending levels have been affected having a knock on effect on the economy, which has suffered a marked slowdown.

Businesses have also suffered, with some lenders going into administration, others having to take various products off the shelves and reign in on lending, and some major companies being brought to their knees as a result of the financial turmoil, Northern Rock being the prime example. Along with concerns over the effects of the credit crunch, the slowing economy, and low consumer confidence, the government also has to think about inflation pressured, making it difficult to come to a decision with regards to where interest rates should go.

One analyst made a prediction for the year, stating: "Economic growth will slow from a final figure of 3.1% in 2007 to 1.9% for 2008, which would be the second-lowest growth rate since 1992. The persistent major headwinds will be consumer spending, business investment and exports. If any of the credit crunch, the US economy or the UK housing market significantly deteriorate, or if the oil price spikes, we could see growth as low as 1.5% - our worst case."

He added: "Consumer price inflation is likely to head up to 2.5% over the next few months as it is pushed up by elevated oil and food prices. Consumer price inflation is forecast to dip back under 2.0% in the fourth quarter of 2008. We expect the Bank of England to cut interest rates by a further 25 basis points in both the first and second quarters of 2008, taking them down to 5.0% by mid-year. While we currently forecast interest rates to remain at 5.0% through the second half of 2008, there is a very real possibility that they could head down to 4.5%."

Tom Smith
6th March 2008

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