Credit crunch to last at least another six months

Mar 31 2008 by Nic Paton Print This Article

It's all too easy to blame the credit crunch on the greed, avarice and short-term stupidity of the global banking system. But its effects are real enough and, with most banks believing it will last at least another six months, it is making life harder and harder for employers and business owners alike.

According to the survey of the financial services industry by the UK Confederation of British Industry and consultancy PricewaterhouseCoopers, nine out of 10 firms believe the credit squeeze will last at least a further six months, compared with the seven out of 10 recorded in the last quarter.

This prolonged squeeze, it is clear, is having a severe effect on the ability of all employers to raise funds and grow, it warned.

Nearly all the businesses polled believed credit conditions would get worse in the next six months – with more than a third predicting this was a "high" likelihood and nearly two thirds saying it was "medium".

The growing impact of the squeeze was also evident in the proportion of firms saying their inability to raise funds would be a constraint on business growth in the coming 12 months.

Four out of 10 said this would be the case, up from the quarter reported last time.

This was largely because of the proportion of banks expressing such concerns, up to a record of two thirds of those polled, agaist slightly more than a third last time around.

And, while they may not get much sympathy in the current climate, the outlook for financial services' jobs is not good, either, the PwC/CBI survey concluded.

A quarter of the firms polled said they had cut jobs over the past three months, the highest rate recorded since March 2003.

Firms' expectations for employment over the next few months (with a third expecting their headcounts to reduce) was the weakest conclusion since December 2002.

It was also clear that lending to borrowers outside the financial services' sector was becoming much harder to find.

The amount of lending to private individuals fell sharply in the three months to March, with lending levels at their weakest since March 1991.

While lending to industrial and commercial companies actually increased, eight per cent of those polled expected lending to these customers to contract in the next three months, while lending to other domestic customer bases was also expected to decline, said PwC and the CBI.

Ian McCafferty, CBI chief economic adviser, said: "It is clear that the credit crunch has worsened over the first three months of this year. The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened.

"While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust within the markets. Credit markets are unlikely to return to anything like normality for some time to come," he added.

"And even when they do, we will not see a return to the very favourable lending conditions that existed before August. We can expect further tough times in the financial sector, as this feeds through into the wider economy, will inevitably be felt through slower economic growth this year and next," McCafferty continued.

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