Are we heading for a recession?

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There is little doubt that the fallout from the sub-prime mortgage crisis in the US will, in one way or another, affect us all. But is this a temporary glitch or a signal of hard times to come? We look at whether the UK and the world face a major economic recession.

The ominous signs have been building for a few weeks now. Increased house repossessions in the US; the Northern Rock crisis; the decrease in mortgage lending; followed by today's heavy losses on the world markets amid renewed uncertainty about the credit crisis.

And as if this wasn't enough, oil prices have rocketed to near the $100 dollar a barrel mark in recent days.

The current crisis stems from US mortgage companies' decision to lend hundreds of billions of dollars to people who were not in a position to repay their debts. Many of these loans have been written off as bad debts which remain concealed in the financial system.

As a result, banks are unwilling to lend money to each other and investors are shying away from the financial sector, as evidenced by today's sharp decline in the markets. Some major global financial institutions have already let thousands of employees go. A deepening of the crisis could lead to heavy job losses in the UK.

The situation in the US is bad. Thousands of homes have been repossessed, house prices have plummeted and the construction sector has slowed dramatically.

The lack of credit is having a knock on effect in the UK. Mortgage lending is down and house price inflation is also dropping, while the cost of credit goes up. This would suggest a blow to consumer confidence and high street spending. However, a survey by the BBC indicates 88% of British consumers would not curb their spending habits if there was a minor fall in house prices.

However, a sharp slowdown in the housing market here could have a significant negative impact on an economy that is driven, to a large extent, by the construction sector. And fewer new houses would mean a drop in demand for items like white goods and decorative materials.

And if the cost of credit continues to rise, we are likely to see dwindling demand for new cars, holidays and home extensions. Meanwhile, UK exports are likely to be hit as a result of the weakening dollar and the economic slowdown in the US.

Recent rises in oil prices will also have their effect. We can expect rises in petrol and home heating costs to be passed onto consumers almost immediately, with a knock-on inflationary effect on general goods and services to be felt later.

While this may be a worst case scenario, the evidence suggests that a worldwide recession is not out of the question. On the flip side, some economists are suggesting that a curb on consumer borrowing and spending could be beneficial for the economy.

What is certain is that most of us will need to tighten our belts and be a little more financially aware, at least in the short term. However, you as a consumer are not powerless. Yes, fuel prices are going up but there are easy ways to cut down energy consumption in your home and in your car. Or maybe you could offset the rising cost of credit by remortgaging. With a little savvy, you could well ride out the current crisis unscathed.

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