Credit crunch bites UK households

The credit crunch could start to affect British consumers, warns the Ernst & Young Item Club.

In a special report, the economic research body claims UK GDP could fall by one per cent because of the credit crunch.

"It is hard to forecast the ultimate impact of the recent volatility. However a worst case scenario of a full-blown credit crunch scenario would reduce UK GDP growth by around one per cent in 2008 and 2009," said Peter Spencer, chief economic advisor to the Item Club.

"For the Eurozone the impact would be lighter whilst for the US it could be as high as a 1.5 per cent reduction."

The report sees "worrying signs" that turmoil from the financial markets - as banks become more cautious about lending to each other - could spill over onto the high street and the housing market.

Item finds a slowdown in the property market is possible as homeowners coming off fixed rate mortgage deals face higher rates.

"Two million UK fixed rate borrowers also face a crunch of their own when their cheap fixed rate mortgages expire towards the end of this year. When they do they are likely to see far more stringent conditions around the conditions that UK lenders offer as well uplift in the monthly cost," the report states.

The body is now calling on the Bank of England to act as "nursemaid" to prevent the credit crunch from spreading.

It finds that a full crisis is still some way off but "more 'nursemaiding' by central banks" may still be necessary to "ward off the threat to growth from the current financial market volatility".

The effects of the US sub-prime crisis have already been seen this week in the UK with mortgage rates increasing, a minor lender going into administration, and Northern Rock calling on the Bank of England for emergency help.