Crunch Time For The UK
The banks might have been saved but as the UK economy heads ever deeper into recession and as unemployment rises and consumer and business confidence falls, many are now asking is the worst over or is it now crunch time for the UK economy and the UK consumer?
The recent budget forecasts provide a clue to answer this question. As one leading economic commentator puts it, the UK economy 'faces a decade of pain'. With the economy set to shrink by 3.5% in 2009 and with government borrowing set to hit £175bn for the next two years, the UK is now a country living beyond its means. Something has to give and the options are limited.
It is reckoned that rising levels of government debt will cost every UK family £2840 each year for the next 8 years just to plug the hole in the government's finances. The bills are now coming in and need to be paid for the effects of the credit crunch. This truly is crunch time for the UK.
And there are only two ways that the bills can be paid and anyone who thinks otherwise is fooling themselves. Either taxes for everyone will need to rise, and the budget shows that the first steps are being taken in this direction with every likelihood of more to come; or public services will be dramatically cut; or as will probably be more likely, a combination of both approaches will be taken. Whichever route is taken, the effects of the credit crunch on the UK economy, on consumers and on businesses will be felt for a very long time.
Many economists reckon that all the recent spending increases in critical services such as health, education and policing, which account for the lion's share of government spending, would be wiped out. Going forward less money would be available to build new schools, hospitals and roads. In other words to get us back living within the economy's means will require tough decisions with tough consequences. Any sighs of relief when the banks were saved were premature. The consequences of the credit crunch are with us still and are likely to be with us for some time yet.
And this squeeze on services and on taxes will hit consumers just as they too are facing crunching times. With the threat of unemployment and the real possibility of rising taxes it is no wonder that consumer spending remains subdued.
Savers are facing interest rates at historic lows. The average instant access rate is now paying 0.29% according to Bank of England figures. But for savers this is not the time to be sitting back and doing nothing. Banks are still desperate for cash and now is the time for savers to take action to hunt out the highly competitive rates that are out there to mitigate the effects of crunch time on their savings and their income.
For borrowers it truly is crunch time with many now sitting on negative equity, unable to move or sell. And with many lenders now asking for increasingly higher deposits before lending to first time buyers, it is difficult to see how the housing market is going to recover fast, even though some encouraging signs are beginning to emerge in this market. There is a direct relationship between consumer confidence and their willingness to spend with house prices. No recovery is possible until house prices turn.
Now is the time to confront these crunching times. It is possible to survive and by taking a few simple steps to crunch proof personal finances and to minimise the impact of these tough times:
• Prepare a monthly budget and stick to it. Identify those areas where sacrifices and cut backs can be made. Ditching that daily cup of coffee on the way to work can save over £300 a year
• Pay back as much expensive debt as possible. This will make a big difference on borrowing costs. And if possible cut up the credit card to avoid adding to what is owed.
• Shop around for the best value bank account, energy supplier, mobile phone company, landline and broadband supplier. Easy to do on the internet.
• Save as much as possible to provide emergency savings for a rainy day. Aim to save 3 months living expenses and have it to hand.
• Buy in bulk, especially on non perishable items and on regular purchases.
This truly is crunch time for the UK and for UK businesses and consumers. At all levels action must be taken to ensure the economic shocks of the recession are withstood. And as they say, it's always darkest before the storm. Hope so.