Downturn In UK Economic Growth

Posted 2008-04-29

The current credit crunch signalling a sharp increase in the cost of obtaining a loan from the major banks, together with inevitable reduction in the availability of loans, may restrict economic growth in the UK by as much as 1% compared to the previous year, according to the Ernst & Young Item Club and reported by the BBC.

The forecast, billed as a worse case scenario, indicated however that it is likely the fallout from the slow down would be contained within the financial services community, though at the same time admitting that there could be a marked affect on the High Street and general housing market if careful and considered intervention by central banks is unable to minimise the damage.

However, as many financial pundits have been suggesting during the past few years, the housing market could not possibly sustain the rise in house prices which have soared by an incredible 185% since 1995, and as a result have continued to give excellent returns on investment.

Despite the current financial climate, this positive view of the market is mirrored in a recent BBC housing and property survey, which discovered that 53% of people taking part still considered property to be ‘safer than cash’. And though some notable financial institutions have been putting a short term freeze on cultivating new mortgage business, published figures show that overall mortgage approvals in February still exceeded the January level of 43,732, rounding up at 43,870.

The credit crunch has also seriously impacted on the secured loans market. The latest Alliance and Leicester monitoring reports indicate that after five recent base rate rises, and with the base rate currently standing at 5.75%, a rise of 1.25% from July 2006, many mortgage holders are cautious about taking up further unsecured loans.

There are also strong indications of a significant slowdown in consumer spending, particularly within the group of those carrying secured debt. The Alliance and Leicester report noted that mortgage borrowers are 50% more likely than other members of the public to reduce credit card amounts and other borrowing that was unsecured.

This trend of thriftiness amongst mortgage borrowers was highlighted by published figures, which showed that the average mortgage borrower repaid £35 on credit cards as opposed to an average borrowing of £52 by non-secured mortgage holders.

Another concerning aspect of the current financial climate, according to reputable financial analysts, is that the number of people struggling with the burden of debt is likely to double in 2008.

According to Debt Management specialists, TDX Group, the credit crunch is already limiting refinancing options, so that it is becoming increasingly difficult to locate the best available deals.

TDX calculate that in the region of one million people in unsecured debt owe cumulatively £25bn, roughly an average of £25,000 per person. The Group’s report stated that in 2007, 58% of those struggling with debt issues, either refinanced or remortgaged in order to reduce the amount of monthly payments.

Those likely to be currently suffering the most are people with adverse credit records who may have increasing difficulties in re-mortgaging, and who may also be prevented from obtaining cash as more and more credit card companies are withdrawing cash facilities from endebted card holders.

The debt management companies have naturally become aware of the increasing demand for their services during the current credit crunch period, with the TDX Group predicting that the number of IVAs and debt management plans could double in 2008. In particular, Eurodebt Financial Services, a leading UK debt management provider, is currently reporting strong growth as consumers seek a real alternative to solving their financial problems in the face of tighter and tighter lending criteria from mortgage and remortgage companies. As a result of this shift towards debt management due to the strictures now being applied to new borrowing, financial advisors are being urged to offer services in debt management and IVA debt plans as an extension to their usual product range.

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