Chancellor Alistair Darling said in an interview published on Friday that the global credit squeeze will affect the economy, but did not say whether he will lower his growth forecast for 2008.
“If you look at the consensus of the economic forecasters, it would be prudent to assume that (the credit squeeze) will have some effect on us here,” Darling told the Financial Times.
“If you look across the world — given the importance of the U.S. economy and given what’s happened here in relation to the effect it will have on the availability of credit –it would be fairly odd if you didn’t take account of that,” he said.
The Treasury is preparing its pre-budget report and three-year spending review, but no date has been set for their publication.
GDP growth is officially forecast at 2.75 to 3 percent for 2007 and in a range of 2.5 to 3 percent for 2008.
The Bank of England left its key interest rate unchanged on Thursday at 5.75 percent for the third month running, but many people expect it to cut rates later this year as the credit crunch in global markets starts hitting the broader economy.
The European Central Bank has provided more liquidity to the banking system over the past two days than it did after 9/11. The US Federal Reserve and the Bank of Japan have also stepped in to prevent a credit crunch and others are on stand-by. Such moments of high drama are rare and there is no doubt that the world is facing more than a routine hiccup on the stock markets. What began as a mini-crisis of rising defaults at the murkier end of the American housing market has spread through the global debt system, infecting roughly $2.5 trillion of new-fangled instruments – collateralised debt obligations, collateralised loan obligations and such like – that together make up what is known as “structured credit”. A string of hedge funds in America, Europe, and Asia have run into trouble.
Fears that other victims might soon surface led to this week’s near-seizure in the interbank markets, which lubricate world finance. The authorities have restored confidence for now, but it remains unsure whether this is just a passing storm, much like the ructions following Russia’s default in August 1998, or the start of a serious downturn in the global economy after the torrid boom of the past five years. A decade of housing bubbles in the Anglo-Saxon countries and Europe’s Club Med group, where euro membership has played havoc with monetary policy, has left many countries acutely vulnerable to a slowdown, let alone a full-blown slump.
Britain managed to ride out the dotcom bust after 2001 without a recession by resorting to a huge burst of public spending. This is no longer possible. Thanks to the legacy of ex-Chancellor Brown, we now have a budget deficit of three per cent of national income at the top of the cycle, worse than Italy, Germany, France or for that matter America. This time we may have to tighten spending or raise taxes if we go into a downturn. As for household debt, it has reached a record 160 per cent of disposable income. These are grim figures, evidence that the British nation has not been running its affairs in a sensible fashion. We may soon find out whether the Brown “miracle” is anything more than a leveraged play – and a dangerous one – on a global credit bubble that now seems to be bursting.