David Prosser's Outlook: Half-time in the credit crisis and the score is only going to get worse

It is a natural instinct to see anniversaries as turning points. But it is already clear that the credit crunch's first birthday 10 days ago was not the moment when the global economy started putting the crisis behind it. Indeed, former IMF chief economist Kenneth Rogoff warned yesterday that the worst may yet be to come – sparking another sell-off on world markets already spooked by concerns about the scale of the problems at the US state-backed mortgage giants Freddie Mac and Fannie Mae.

Could we really only be half way through this cycle, as Mr Rogoff suggests? The answer is yes, now that what started as a banking crisis has spread throughout the economy. The first phase of this grim period was marked by disastrous losses on mortgage-backed securities. But now banks are facing up to a much more conventional source of write-offs – mounting bad debts.

On both sides of the Atlantic, unemployment is continuing to rise while house prices keep falling. The result can only be further increases in the number of people unable to service the record levels of personal debt taken on over the past 10 years. That means further pain for the financial sector, further pressures on consumer confidence and further setbacks for sectors from construction to retail.

Britain and America have already taken different views on how to tackle the crisis. Only yesterday, Tim Besley, a member of the Bank of England's Monetary Policy Committee, was warning that we cannot give in to the temptation to cut interest rates sharply to counter an economic downturn, because doing so would risk a return of 1970s-style inflation. The US Federal Reserve, on the other hand, has been less cautious, and the US Government has also done its bit with generous tax incentives designed to get people spending.

The consequences of these two approaches have been as you might predict. The US is battling a much worse inflation problem than the UK – look at yesterday's producer price figures, for example – but economic growth in America is holding up better than here.

We'll get an idea today of whether Mr Besley and his colleagues are moving closer towards the American view when the Bank publishes the minutes of the MPC's last meeting. We know, of course, that the MPC voted to hold rates at 5 per cent, but did anyone join David Blanchflower in the corner clamouring for a reduction (or for that matter Mr Besley's corner, where the call was for a rate rise)?

It is harder for the MPC to throw caution to the wind on inflation, because it is held to account very publicly every month on its performance. Still, while the Bank's inflation report last week suggested it now sees inflation peaking at a higher rate, it also expects this peak to be reached more quickly. The currency markets interpreted that conclusion as a signal that interest rates will fall sooner than had been previously expected.

Even so, cuts in the cost of borrowing are unlikely to come in the next couple of months. And despite recent corrections on global commodity markets – the original source of the West's inflation problem – price rises, as the Bank acknowledges, are set to continue. The most recent figures did not even include the latest price hikes from the likes of British Gas.

What this means for household finances is pretty simple – the squeeze on disposable income is set to continue. And as more and more borrowers come off cheap mortgages, arrears levels will increase. So too will repossessions. Then the second phase of the crisis will really take hold. Mr Rogoff thinks a major US investment bank will be the next victim of this affair. But closer to home, there will be many much smaller victims before this downturn is over.