Causes of Economic Downturn

Today, Mervyn King painted a gloomy picture of the UK economy. He said:

“It’s very difficult to know how long we’ll be in recession. I think we probably are in recession now – 2009 is going to be a difficult year.”

Mervyn King also said inflation was likely to fall below the target of 2% next year, but he admitted the outlook was generally bleak and would not hesitate to cut rates again if necessary. Quotes by Mervyn King from November inflation Report.

The report came out on a day when unemployment rose to an 11 year high of 1.825million. [link] Unemployment is forecast to rise sharply as the economy continues to contract and unemployment often lags 6 months behind changes in economic growth.

The causes of the sharp economic downturn in 2008 are:

• Falling House prices (why house prices are falling) (problems with Housing Market)
• Credit crunch (see: mortgage crisis explained)
• Contraction of Credit following demise of Lehman Brothers and general credit crunch
• Fall in Confidence affecting consumer spending and investment
• Global downturn in economic growth (financial crisis explained)
• Cost Push inflation of early 2008, causing a squeeze in living standards

See also: Video on Causes of Current Recession