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The Credit Cruncher was conceived to help you to keep up to date with credit crunch and recession developments, it provides some helpful credit crunch advice and it addresses personal debt. The Credit Cruncher also seeks to explain how the credit crunch started and shed some light on the worldwide recession. Recently, we have begun to look at how BREXIT will affect the UK economy. Please feel free to leave comments where relevant.

28 Jan 2009

UK economy set for deep recession

According to the International Monetary Fund, the UK economy is set to shrink by 2.8% this year - a significant drop compared to previous predictions of between 1 and 1.5%. This could turn out to be the worst drop experienced since the 1940's.

On reading the headlines, this could sound like we will all be destitute, but when you consider that the economy has been over-inflated on debt for decades, it is hardly surprising that there should be a redressing of the balance somewhere along the line. Don't forget, a week ago there was every chance that a footballer was going to change hands for over £100m - just thirty years after the very first £1m player (Trevor Francis sold by Birmingham City to Notts Forest).
A good indication of how the economy has been over-inflated, is the sharp rise in housing prices over the last decade. When you look at the graph of house prices:

The steep rise is way out of line with the 'natural' climb in house prices that you would expect to see in line with inflation and the general cost of living.
[in the picture (left), the thirty year trend is shown as a red line - it runs left to right and sits at a level between the low points (valleys) and high points (peaks)].
When the actual price varies so wildly from the trend, there should be a redressing of the balance, and prices will most likely fall to form a new low point as indicated 'X' by hand on the diagram (just my rough guess...).
The knock-on effect of the house price rise specifically has been to lead people to believe that they are wealthier than they actually are, and to borrow against this capital. This effect knocks-on into the economy as a whole with spending being driven by these 'fantasy' house prices. The drop in economic activity is due in part to reality kicking in a house prices slowing down as they were bound to do eventually. Of course the banks got caught up in the same fantasy and the credit crunch was born...

The economic crisis has had, of course, a global effect and in the global picture, it is estimated that 50 million jobs could be lost worldwide this year in a' worst case scenario' prediction based on the current economic crisis. It is estimated that the developing world will suffer most.

Related posts:
UK in recession
Is there really a credit crunch?
CBI predicts 'shallow' recession
Is this the new Great Depression?

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