Tuesday, October 9, 2007
One possible road map for 2008 looks something like this. The credit crunch continues to bite, keeping the cost of borrowing for businesses and consumers high. The financial sector, on which Britain is dangerously dependent, contracts. This pushes unemployment higher and reduces government revenues further. Meanwhile, inflation refuses to lie down (yesterday's producer prices data are the latest indication) so the Bank of England can't cut rates as fast as it might wish. The housing market falls over and a mid-cycle pause becomes a full-blown recession.