Credit Crunch Is 'Opportunity'    
Industry News

Source: Inthenews.co.uk

The current global credit crunch provides "an opportunity to rebalance the economy", a group of leading economists has said. According to Ernst & Young's Item Club the UK's economy has become "overly dependent on lax credit and monetary conditions".

In its latest economic forecast the influential group subsequently argues that, rather than harming the country's economy, the tightening of lending conditions prompted by the credit squeeze will allow it to be placed on a more solid footing.

Commenting on the present economic situation Peter Spencer, chief economic adviser to the Item Club, said: "This is a very timely tightening, targeting parts of the financial sector that were growing too fast and were too dependent on cheap credit."Having to reverse gear may not be such a bad thing."

But while the Item Club stresses that the stability and strength of the UK's economy will help the country cope with the impact of the credit crunch, it has also slashed its forecast for economic growth. Today's report by the group estimates that the UK economy will grow by just 2.1 per cent in 2008, down from the 2.5 per cent it forecast in July.

The Item Club's lower expectations for economic growth come after the chancellor Alistair Darling also cut the government's own official forecast for the economy earlier this month. Although evidence has yet to emerge of an economic slowdown, analysts believe the credit crunch is likely to impact upon the wider economy in the long term.

Rising default levels in the US sub-prime mortgage market are responsible for the global credit squeeze, with banks having become increasingly wary about who they lend cash to as a result of uncertainty about the extent to which they are exposed to bad debts in the sector.

However, unlike other forecasts, the Item Club does not expect the UK's housing market to be significantly hit by the turmoil in the credit markets. Last week the International Monetary Fund (IMF) warned that the UK could face a sharp fall in house prices, similar to that experienced in the US. But the Item Club said it did not believe that tighter lending conditions for homebuyers would lead to a "serious correction" of house prices in Britain.

The group did warn though that the Treasury would see tax revenues from the City "sharply curtailed" as a result of the credit squeeze, with the chancellor likely to be forced to curb the growth in public spending as a result

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