The Financial Crisis: Now the real problems begin

You've read about the worldwide economic crisis and its puzzling elements, such as derivatives and bank capitalisation; you've anxiously clicked on to websites for updates, and watched the BBC's apocalyptic reports on the television screen. Now it's going to start coming a lot closer to home – maybe even your own.

While some of direst warnings of what it means for all of us, our jobs and savings will almost certainly prove to be the work of professional pessimists (the short-sellers of our public life), there are indications that we have ahead of us at least a year of recession. That's the bad news. The good is that, unless further major calamity strikes the financial system, 2010 could see a significant improvement. The IMF forecasts that Britain's economy will grow by more than 2 per cent that year.

But there will be hard times before we reach those sunlit uplands. According to Peter Spencer, chief economist at Ernst & Young, Britain is in a recession that will last for a year. He predicts the downturn will bottom out in the second half of 2009, and that there will be growth in 2010, but only by 1 per cent.

For many British families, the crunch has already been under way for some months. During September, the average household was £14 a week worse off than it was a year ago, according to a study carried out by the Centre for Economics and Business Research (CEBR) on behalf of Asda. Although there was, over that period, an increase in people's weekly average post-tax earnings of £19 to £545, this was more than eliminated by a £33 jump in the cost of essential goods and services, such as food, utility bills and transport. Overall, the typical family had just £130 of disposable income left during the month after paying tax and meeting all essential outgoings. Douglas McWilliams, chief executive of CEBR, did have some comfort. He said: "September could well mark the peak of pressures on the cost of living for families. Inflation is likely to fall quite sharply over the coming year as demand weakens with the incumbent recession."

But with rocky times still forecast for the next 12 months, many Britons are taking steps to try to generate extra income. Nearly two-thirds have taken on extra work, sold their possessions or turned their hobby into a cash-generating venture, according to a survey by American Express Platinum. The average person manages to generate an extra £876 a year from these activities, with 4 per cent of people raising more than £200 a month and one in 100 bringing in at least an extra £600 a month.

Eight out of 10 people make extra cash by filling in online marketing surveys; 72 per cent sell possessions on internet auction sites; and one in 20 writes blogs that generate advertising revenue. Others are earning money by playing in a band, growing fruit and vegetables to sell at local markets, making clothing or jewellery, or teaching anything from music to foreign languages.

Jobs

Unemployment is at its highest level for nearly a decade, with a thousand people losing their jobs every day. By Christmas the number without jobs is expected to top two million. David Kuo, financial expert at the money website Fool.co.uk, said: "Job losses are unavoidable because the economy is shrinking. By next year it is likely to reach three million, which will mean one in 12 people out of work."

Pay

Despite last month's inflation rate being the highest for 16 years at 5.3 per cent, the average pay rise this year was 3.4 per cent, the lowest for five years. Mick McAteer of the Financial Inclusion Centre said: "Although inflation is higher than expected, it's difficult to see wages reflecting that. Employees in the private sector will find it hard to be in a strong bargaining position because of the expected rise in unemployment."

Mortgages

Only 15,600 first-time mortgages were approved in August, down 55 per cent from last year, according to the Council of Mortgage Lenders (CML). For those without a deposit of 10 per cent or more it is nearly impossible. Ray Boulger of John Charcol mortgage brokers said: "People won't be able to find a mortgage of more than 90 per cent now, and as long as property values keep falling that will stay the same."

Homes

Houses are selling at an average of 9 per cent below asking price, according to the Royal Institute of Chartered Surveyors, and the volume of sales earlier this year was virtually half that of a year ago. But some estate agents are confident the market will start to show signs of recovery by early 2009. "We're certainly at the beginning of the end of the freefall in house prices," said Chris Wood, National Association of Estate Agents.

Shopping

Latest figures from the British Retail Consortium (BRC) show sales falling more sharply than at any other time in the past five months. The organisation predicts retail conditions will remain tough until well into next year at least. A BRC spokesman said: "Customers are short of spare cash and reluctant to spend what money they have got, and those conditions show no signs of changing in the near future."

Petrol

Petrol prices have fallen by 6.5p a litre over the past month. Industry experts expect prices to continue to fall over the next few weeks before demand for fuel over winter, not to mention efforts by oil-producing countries to limit supply, pushes prices back up again. "Falling pump prices are the only bit of light in a very gloomy financial tunnel," said an AA spokesman. "But eventually these prices are going to go back up again."

Borrowing

Interest rates were cut by 0.5 per cent this month – after pressure was put on Mervyn King, the Governor of the Bank of England, by the Government. However, many in the City are convinced that this will not be enough to stimulate the economy as it falters over the next 12 months. Chris Watling, the chief executive at Longview Economics, has forecast a further 1.5 per cent cut to 3 per cent. Others have called for "savage" cuts.

Savings and investments

Falls in stocks and shares hit savings and investments hard. The market will remain volatile until Christmas, say analysts, and is unlikely to start recovering until early next year. "We are at a level now where people will be able to make respectable gains over the long term, although it will be painful in the short term," said Gavin Aldon of the Share Centre. "In the immediate future we will see a substantial fall in interest rates."

Taxes

As fewer people buy houses and unemployment continues to rise, the Government will be getting less money from taxes. And the £50bn spent on the bailout will have to be recouped from somewhere. Carl Emmerson of the Institute of Fiscal Studies said: "We don't think in the short term the Government will reduce spending or increase taxes. But after the next election it is looking increasingly likely."

Pensions

Britain's biggest pension schemes lost £45bn in value since the summer. Experts warn that recovery will not happen overnight. "There are two important things to grasp about the impact on pensions," said Nigel Peaple of the National Association of Pension Funds. "First, if you are already drawing your pension you will be unaffected by the market falls. Second, pension funds are all about long-term investing."