Will the U.K Economy Survive?

The United Kingdom economy is in the early stage of a severe recession according to the most recent economic data. But will the recently announced £500bn bank bailout package and drastic interest rates cuts bring relief to a rapid deteriorating economy?

The task of fixing the British economy may be more difficult than expected because of the massive debt-fuelled boom in asset prices and spending over the last few years. Indeed, the U.K. has the highest household debt/income ratio in the G7, the highest combined level of household and corporate debt/GDP among the EU 15 countries. Moreover, despite the recent decline in oil prices, inflation is still high; industrial production has slowed down and unemployment rate has risen in to levels not seen in 17 years.

In our view, taking into account the scale of household and businesses debts; the government measures like the recapitalization, guarantees for wholesale funding, extra liquidity support and lower policy rates may not be as effective as widely expected. In fact, no matter how much capital the BoE will inject into the system, the pressure to borrow and spend less will continue among households and businesses, given the existing concerns about the solvency of many financial companies. The government gave a guarantee of £500bn to banks, which accounts for 35% of U.K. GDP. The problem here is that the UK financial system depends on the overseas funding and since this crisis is global this financing may no longer be available.

Anna Fedec, contact@tradingeconomics.com
10/16/2008 4:19:51 PM