Crunch to hit Britain's GDP growth
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The credit crunch is likely to knock at least one percentage point off Britain's GDP growth, according to a study by Capital Economics, an economic consultancy.*
Vicky Redwood, a UK economist at the firm, estimates that even the narrower effects of the crunch will bring GDP growth down to 1.7% this year and 1.5% in 2009. This is even before the broader impact on consumer spending and investment is considered.
The study is based on a breakdown of Britain's GDP (see table). Overall financial and business services (FBS) accounts for about 30% of output. Of this about 10% is in financial services and 20% in business services.
Wholesale financial services, including investment banking and fund management, are likely to be worst affected. According to the report: "By far the most important part of wholesale financial services, accounting for two-thirds of the sector's output, is banks' commissions from brokerage, mergers and acquisitions, securitisation and equity and bond underwriting. These fees will have taken an immediate hit".
Fund management, which accounts for a further 15% of this sub-sector, will suffer as a result of falling performance fees. Assets under management will also have fallen.
However, wholesale business only accounts for 2.5% of GDP compared with 7.5% for retail financial services. About 65% of retail finance is accounted for by lending and deposit taking activities. Slower growth in lending volumes should dent such activity.
Within business services some sectors will suffer little as a result of the credit crunch. These include research and development and renting machinery. But the bulk of business services are likely to suffer a knock-on effect from the slowdown in finance including legal, accountancy, IT and recruitment services. Of the 20% of GDP in business services some 13% looks vulnerable to the credit crunch, according to Capital Economics.
Overall two-thirds of the FBS sector, or one fifth of the total economy, will be directly hit by the recent credit problems. Capital Economics concludes: "We continue to think that a sharp and protracted slowdown in the overall economy is in store."
* "UK Economic Focus". February 28. 2008.
