Economic Downturn Looking More Likely
The Bank of England has expressed doubts about the future of the UK economy as the global credit crunch continues to bite, and the UK could be heading for its first recession for 16 years. In addition investment bank Morgan Stanley says the ripples from the Northern Rock problems could severely knock consumer confidence and the housing market, resulting in negative economic growth.
The Bank said family spending’s future was ‘more uncertain than for some time’ as it was concerned about the health of the finances of UK households.
The growing economic gloom particularly leaves buy-to-let investors and first-time buyers exposed to economic worries, and the warnings will increase fears that the credit crunch if damaging the economy.
The problems began in the US sub-prime market, but have had such wide repercussions that Northern Rock had to borrow money from the Bank of England, savers queued round the block to withdraw their money, and now UK consumers are feeling the effects of increased mortgage interest and less chance of getting loans and mortgages.
Commercial property experts in the US have predicted that the economy would slowdown in the next few months and then probably tip into recession. Morgan Stanley told its clients: “It is very important not to underestimate the impact of the psychological shock of the failure of Northern Rock on people in the UK.”
The Bank of England’s Financial Stability Report said that buy-to-let investors, first-time buyers and low-income homeowners with mortgages were most at risk, saying that some may not be able to take the pressure of further increases in their borrowing costs.
The problems may spread wider. Equity markets are said to look vulnerable, and more mortgage defaults in the US could deepen the US economic downturn, triggering stock market falls around the world. For the financial industry, the first run on a bank for over 140 years means that lending rates are not likely to get any cheaper for a long time yet. Balance sheets remain fragile and the chances of further ‘coporate distress’ have risen in recent months.