Gloomy prediction for UK economy

August 2007

A senior economist has made gloomy predictions for the economy in the UK, following the impact of problems with sub-prime lending in the US.

George Magnus, a senior economic adviser at UBS Investment Bank, made the comments BBC Radio 4's Today programme, after credit problems in the US have negatively impacted on the world's stock markets.
He added his voice to those already predicting that a much feared credit squeeze could be on the cards.

Mr Magnus said: "What we're really talking about is a credit cycle, which we've seen the bright side of that over the last several years, and I think what's happening at the moment is that it's in the early stages of a great unravelling, and these things are not usually pleasant."
If this "great unravelling" is underway, financial institutions, borrowers and eventually the economy, will all feel the effects, he warned.

Mr Magnus said that the most serious consequence would be de-leveraging, the opposite side of the all the borrowing and the growth and acquisition it has funded

"When de-leveraging happens people basically have to pay off debts or they have to recognise losses on transactions or deals, whether it's in housing or whether it's in corporate dealing.

"The run down in debt, or the stabilisation of debt, basically is something which will have economic implications in terms of lower growth and ultimately probably higher unemployment," he said.

The effects were already beginning to be seen he said, in an increase in the cost of borrowing and decreased availability of credit.
"You can see the same sort of thing happening in the housing market as well, so I think these things are quite serious," Mr Magnus concluded.

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