Credit Crunch Threatens US and UK

17 September 2007

LONDON: The US and UK may see economic growth fall by 1.5% and 1% respectively in 2008 and face a "credit crunch" as a result of the rising subprime mortgage crisis, according to a recent report by the Ernst & Young Item Club.

Whilst this prediction is based on a "worst case scenario" (given that the financial services industry may be able to contain the current problems), the report also cites "worrying signs" for the retail and housing markets, including rising interest rates.

In particular, the Club's chief economic adviser Peter Spencer said that the combination of rising loan defaults, a decline in construction levels and the possibility of more bad debts could further weaken the US housing market, adding "to the risk of a generalised credit crunch".

He also argued that the current situation may well exert a "ripple effect" across Europe, and also impact the City of London, which is "unlikely to see the mega deals and mega bonuses that resulted from these extraordinary conditions".

Data sourced from BBC Online (UK); additional content by WARC staff