The credit crunch has caused the United Kingdom’s economy to slow drastically, says U.K. Chancellor of the Exchequer Alistair Darling, and the outcome of the credit crunch is “more profound” than experts had predicted.
“The scale of what happened …. It is unprecedented in recent times. These are extraordinary times,” he told Bloomberg News.
Darling says the declines in the housing market and rising oil prices have resulted in drastic changes in the market, and that countries around the world need to work together to resolve the crisis.
Data released last month by the Office for National Statistics showed the U.K.'s gross domestic product grew by only 0.2 percent from April through June, compared with the first three months of 2008.
The ONS said that was the slowest rate of growth in more than three years. It blamed weaker construction and production output for the decline.
The ONS also said that Britain's economy grew 1.6 percent during the second quarter, compared with the same period in 2007 — the smallest annual expansion since the second quarter of 2005.
“The effect of what has happened is going to be far more profound than people predicted even at the turn of this year,'' Darling says.
“It is quite clear that if you look during the course of this year, conditions have become more difficult across the world.”
Despite the dual pressures of the credit crunch and high oil prices causing other commodities to increase in price, Darling said the economy will eventually rebound.
He said the UK’s economy is “resilient” even though times are “tough.”
“We’re trying to anticipate what the next stage will be. We believe the economy here will continue to grow. Our economy is strong."
Darling emphasized the need to keep inflation levels as low as possible. He said the target has been set at 2 percent. “At the moment, we are going through a choppy period," he admitted.
Bank of England policymaker David Blanchflower echoed a similarly negative outlook and predicted that growth will contract for as long as one year. This could result in the Bank of England reducing interest rates “well below” their current 5 percent, Blanchflower told the Guardian newspaper.
“We have to act right now. Monetary policy has been far too tight for too long,” he said.
On Aug. 7, the BofE announced it kept official interest rates steady at 5 percent for the fourth month running as it grapples with opposing factors of slowing economic growth and rising inflation.
If interest rates remain at their current levels, the economy could face a longer and wider recession, Blanchflower said.
Interest rates must be slashed soon or hundreds of thousands of jobs are at risk, he said.
Blachflower thinks it is possible that the U.K. will face a recession worse than the one in the United States. He has advocatedfor interest rate cuts for the past nine months despite the reluctance of the other eight members of the monetary policy committee to do so.
"I think we are going into recession, and we are probably in one right now,” Blachflower said. “It's not too late to stop it, but we have to act right now."
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