Credit crunch bites the UK for £600bn

The global credit crunch has wiped £600billion – the equivalent of just over £1million a minute – off the UK’s total wealth since it began one year ago.

Tabling their “conservative” estimate, analysts at PricewaterhouseCoopers said the 12-month loss was based on falling house prices and falling values of listed firms.

They calculated that since house prices began to fall in September last year, the level of wealth in UK housing fell 9%, or £400bn, for the 12 months to June 2008.

Over the same time, the UK’s financial institutions and banks, the outfits most exposed to the stresses in global markets, generated a stock market loss of £200bn.

This level of “wealth destruction” is expected to lead to around £12bn to £16bn of lost expenditure over the next 18 months, as less equity in both markets filters through.

Thanks to businesses and householders being pressured to spend less, the loss to GDP could be around 1%; enough to tip the UK into or nearer a recession.

But the lagged effect of reduced wealth on spending means the loss would take “a year or so before” the full effect was felt, so it would take until 2009 for household spending growth to ease to 0.5%.

Although all the estimates exclude the impact and any overspill into other sectors, PwC said they stem from the sectors “most directly and most severely impacted” by the credit crunch.

“The fall in UK house prices…has driven down the level of wealth tied up in UK housing by around £400bn, representing a 9% fall year-on-year of the value of the UK’s housing stock”, said John Hawksworth, head of macroeconomics at PwC.

“In addition to this, the drop in value of finance related equities has generated a loss of stock market capitalisation of around £200bn for finance related firms in the year”.

Mr Hawksworth said the combined loss of national wealth of around £600bn will add to downward pressures on UK economic growth over the next year.

The downbeat outlook tallies with the latest reading from the CBI, which warned on Thursday that the “slowdown in the UK economic activity is gathering pace.”

However, its director-general Richard Lambert said the Bank of England was right to leave interest rates at five per cent last Thursday, as inflation looks set to head higher.

In a reported letter to CBI members, Mr Lambert was quoted as saying that the employers’ group “has been consistently overoptimistic about the economic outlook over the past 12 months.”

Obtained by the FT, the letter, written to mark the one-year anniversary of the credit crunch, predicted that growth prospects for 2009 and “into 2010 look no better than anaemic.”

It also reportedly blames the government for compounding the situation by unsustainably spending in previous years, which has “left the public finances in a poor shape to cushion the economy”.

Lambert hopes that inflation should take its likely course and fall sharply by the second half of net year, giving the Bank room to ease its monetary policy and help consumers “to feel more confident about the world.”




12th August 2008

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