Although Northern Rock's bail-out by the Bank of England has few direct repercussions for the British economy, the event sent out a warning that the credit crunch could last for longer than most had expected.
The short-term effects of the credit crisis look to be minimal. However, a prolonged crunch could inflict serious damage on the financial services sector – which is the biggest contributor to the UK economy. If financial institutions find they are unable to borrow to fund their growth, they will inevitably be forced to make job cuts. Any large rise in unemployment would be sure to quickly slow growth across the economy.
Although consumer sentiment remains relatively robust, it also remains possible that the fall-out from the crunch – epitomised by scenes of consumers queuing round the block to cash in their Northern Rock accounts – takes its toll on the high street.
As Howard Archer, an economist at Global Insight, explains: "News coverage of people queuing up to withdraw their savings from Northern Rock could increase general concern about the economic outlook. Any hit to confidence increases the risk that consumers will become more cautious in their spending over the coming months, and that businesses will become more inclined to downgrade their investment and employment plans.
A speedy resolution to the credit crunch, however, could leave the UK economy relatively unscathed. With manufacturing growth hitting three-year highs, unemployment still low and high-street sales buoyant, the economy is by no means on the rocks just yet.Reuse content