Yorkshire Bank economist puts credit crunch in perspective

The lower level of sterling and trade links with developing economies will provide businesses with opportunities for growth during the downturn, a leading economist told a gathering of Yorkshire business people.

Speaking at the Yorkshire Bank Annual Guest Lecture held in association with Leeds Business School at Cloth Hall Court in Leeds, David Tinsley, UK economist with Yorkshire Bank and formerly with the Bank of England, said that while the slowdown was now being felt strongly in emerging economies, there would continue to be pockets of growth outside of Western economies and as the recovery begins exporters will find high-growth markets coming back on stream. That will provide manufacturers hope amidst the downturn for a return to future expansion.

Additionally, the cuts in official interest rates by the Bank of England and the Government’s extensive fiscal packages will provide support to demand over the next eighteen months or so.

Mr Tinsley said: “We are now at the ‘end of the beginning’ of the credit crunch. The financial sector will not return to its pre-2007 shape. There will be fewer banks and less credit products. Indeed, the entire sector is likely to contract.”

However he said the situation should be kept in perspective. Although the most recent estimates put western banks’ total financial losses at up to $1.4 trillion, in real terms this was smaller than the 1997 Asian financial crisis or the Japanese banking crisis of the 1990s. It was also geographically much more widely spread.

He told the audience that the Yorkshire economy grew very strongly in 2007, before slowing sharply last year: “That seems to reflect a slowdown in public sector spending, which has already fed through to labour markets.

“Restructuring in the manufacturing sector looks to be over as far a labour market data are concerned. Exports to Asia should benefit from relatively higher growth in those markets. The ongoing credit crunch could weigh on financial services activity, which has been particularly successful in driving growth in Leeds.

“Having been one of the fastest growing regions in the UK, we look for regional growth to fall from 3.7per cent in 2007 to just 0.5 per cent in 2008 and then to fall by 2 per cent in 2009.”

Mr Tinsley said that by historical measures the housing market is still overvalued - so far real house prices have fallen by around 20 per cent compared to 37 per cent in the last downturn.

However he added: “The UK has not experienced the building booms seen elsewhere, especially when compared with the United States and Spain so not all is doom and gloom in the housing market. Construction activity is slowing sharply. Any oversupply of housing could well have disappeared by 2010, especially as housing gets cheaper.”

He said the Chancellor may be assuming a return to robust growth too soon. Indeed, with most government measures designed to boost the economy expiring in 2010, the risk is that a weak recovery trend could push the UK into a ‘W’-shaped recession.

But he added: “Government spending and investment will support some businesses, especially those in infrastructure. And corporate balance sheets are in good shape. Most will be able to wait out the recession. Some will benefit from falling asset prices.

“Net exports are also likely to provide a lift, especially if sterling falls back against the US dollar and any contagion of the credit crunch to emerging markets is contained.

“By 2010 growth will get back towards trend, but growth could struggle to rise above 2 per cent thereafter.”

David Maybury, regional director of Yorkshire Bank’s Corporate & Structured Finance team in Leeds added: “The lecture was extremely well attended and David Tinsley’s views gave an interesting insight as to how the credit crunch could also  provide opportunities for Yorkshire businesses.”

For further information contact:
Sam Dabbs, Dabbs PR & Marketing, Tel. 07711 672893

Alison Puente, Yorkshire Bank, Tel. 0113 807 2701