What Economic Factors Appear to Have Contributed the Most Recent (2008/09) Recession in the Uk Economy?
What economic factors appear to have contributed the most recent (2008/09) recession in the UK economy?
In 2008-2009 there had been a decline in the UK economy GDP for 6 consecutive quarters due to many economic factors. An overall summary of the factors to have caused the recession are: the decrease in production and construction output & weaker service industries distribution.
The first the factor contributing to the recession was the subprime credit crunch crisis. ‘The credit crunch refers to a sudden shortage of funds for lending, leading to a resulting decline in loans available’ (Finance Blog: 2011) this occurred in 2007 when:
US mortgages companies and lenders gave out bad loans and sold many inappropriate mortgages to customers with low income and poor credit, to sell more profitable subprime mortgages, mortgage companies bundled the debt into consolidation packages and sold the debt on to other reputable worldwide banks and finance companies. In other words, mortgage companies borrowed to be able to lend mortgages (Finance Blog: 2011). However as the debts became so great the banks and companies that invested in the US mortgage companies lost the money they lent to them which led to the main shortage of finance. Now banks we’re trying to borrow of each other in order to cover finance as well as have finance to provide mortgages.
The second factor was because of the falling house prices. This occurred due to the shortage of mortgages due to the credit crunch (economicshelp: 2008). There was a ‘rise in mortgage defaults, as many new homeowners could not afford mortgage payments’ due to high interest rates and other factors so it was difficult to get a mortgage so the demand of houses fell so the prices fell too. ‘Lower house prices meant many face negative equity’ (Finance Blog: 2011) as the house prices fell this effected to reduce consumer spending as housing is an important form of wealth if people see them decreasing they tend to spend less.
In 2008-2009 there had been a decline in the UK economy GDP for 6 consecutive quarters due to many economic factors. An overall summary of the factors to have caused the recession are: the decrease in production and construction output & weaker service industries distribution.
The first the factor contributing to the recession was the subprime credit crunch crisis. ‘The credit crunch refers to a sudden shortage of funds for lending, leading to a resulting decline in loans available’ (Finance Blog: 2011) this occurred in 2007 when:
US mortgages companies and lenders gave out bad loans and sold many inappropriate mortgages to customers with low income and poor credit, to sell more profitable subprime mortgages, mortgage companies bundled the debt into consolidation packages and sold the debt on to other reputable worldwide banks and finance companies. In other words, mortgage companies borrowed to be able to lend mortgages (Finance Blog: 2011). However as the debts became so great the banks and companies that invested in the US mortgage companies lost the money they lent to them which led to the main shortage of finance. Now banks we’re trying to borrow of each other in order to cover finance as well as have finance to provide mortgages.
The second factor was because of the falling house prices. This occurred due to the shortage of mortgages due to the credit crunch (economicshelp: 2008). There was a ‘rise in mortgage defaults, as many new homeowners could not afford mortgage payments’ due to high interest rates and other factors so it was difficult to get a mortgage so the demand of houses fell so the prices fell too. ‘Lower house prices meant many face negative equity’ (Finance Blog: 2011) as the house prices fell this effected to reduce consumer spending as housing is an important form of wealth if people see them decreasing they tend to spend less.