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By Richard Evans
The British economy was officially pronounced in recession a couple of weeks ago. But we all know that our economic woes began a long time before that. For the strict definition of recession to be met, there need to be two consecutive three-month periods of economic contraction. Those two quarters, the recent figures showed, were the last six months of last year - so the recession began at the start of July 2008. Even this date is almost a year after the onset of the credit crunch. "The day the world changed", according to the head of Northern Rock at the time, was August 9 2007. Here we chart the story of the economy's downturn since that day. The markets experienced volatility in late July and early August 2007, with shares and bonds - tradeable IOUs issued by companies and governments - both falling. Many interpreted this as a sign that investors had finally realised that the good times were not going to last for ever. Northern Rock was revealed to have sought emergency funding from the Bank of England on September 13 2007. Worried savers began to queue outside branches to withdraw their money, exacerbating the bank's funding problems. The Rock relied particularly heavily on the wholesale money markets to fund its lending, so it felt the onset of the credit crunch - which is a essentially a reluctance to lend on the part of all participants in the markets - sooner than most. The Government's attempts to prop up the Rock while it found a private sector buyer failed and it was nationalised - temporarily, the Government said - on February 17 2008. The credit crunch saw loans become both more scarce and more expensive. The gap between official interest rates and the rates that borrowers actually paid increased dramatically. Bear Stearns, the American investment bank, was taken over by a rival on March 16 2008 after coming close to collapse Two of America's giant state-backed mortgage companies, Fannie Mae and Freddie Mac, were effectively nationalised by the US government on September 6 2008. Hopes that the bail-out of Fannie Mae and Freddie Mac marked the beginning of the end of the financial crisis were dashed a few days later when, on September 15, Lehman Brothers filed for bankruptcy protection. Meanwhile, Merrill Lynch, another giant Wall Street investment bank, was taken over by a rival. Many believe that the downfall of Lehman was the trigger for a second, more intense phase of the credit crisis and that the American government's decision to allow it to fail was a catastrophic mistake. Later that week the banking crisis returned to Britain when HBOS, the parent company of the Halifax and Bank of Scotland, was forced to accept a takeover by Lloyds TSB. Over the previous few days, HBOS shares had fallen dramatically. Many blamed "short-sellers" - investors who borrow shares, sell them and then buy them later at a lower price, effectively betting on the shares falling. Bradford & Bingley, the buy-to-let mortgage lender, also needed rescuing. Savers' accounts were transferred to Abbey, the Spanish-owned bank, on September 29, while the mortgage side was nationalised. In early October the Icelandic banking crisis erupted. The many British savers with money in Icesave and Kaupthing endured an anxious few days before the Treasury announced on October 8 that it would ensure all customers received their money back in full. Two days later the Government's announced its bank rescue package, with tens of billions of pounds injected into banks including Royal Bank of Scotland and HBOS in return for large stakes in the businesses. Other measures included an extension of the Bank of England's programme to make money available to the banks and another scheme to guarantee certain debts. On the same day, the Bank of England announced a surprise cut in interest rates of half a percentage point - the first in a series of reductions that would take the base rate to its lowest ever level of 1.5 per cent. The slowdown was also making itself felt outside the banking world. In November unemployment hit an 11-year high of over 1.8m. Then two famous retailers, Woolworths and MFI, called in the administrators (on November 27 and 26 respectively). Other retailers had run into trouble earlier in the year. ScS, the sofa maker, went into administration on July 3, while Rosebys, the furnishings group, followed suit on September 25, as did rival Hardy Amies a day later. Many more were to follow, including The Officers Club and Whittard of Chelsea on December 23 and Zavvi, the former Virgin Megastore, the following day. Zavvi was badly affected by the failure of Woolworths, which was one of its suppliers. USC, the fashion chain, followed on December 29, as did rival Adams on the last day of the year. Waterford Wedgwood, the long-established china maker, called in the receivers on January 5 2009. Most of the failures among retail companies were blamed on poor trading conditions on the high street, as supermarkets continued to compete ferociously, consumers cut back on non-essential spending and companies struggled to find affordable financing. On January 22 it was announced that the number of home repossessions had almost doubled in a year, with over 13,000 properties being taken back by the lender in the three months to the end of September. The Government has announced various measures to help homeowners in difficulty: state benefits that help pay mortgage interest have been improved, while more shared ownership is being encouraged. A new scheme will allow those who experience a sudden drop of income to take two-year mortgage repayment "holidays". After two colossal bank bail-outs, other sectors have begun to clamour for state assistance. The Government announced a package of measures worth over £2 billion for the car industry on January 28, and a few days later the head of Marks & Spencer, Sir Stuart Rose, called for financial help for struggling retailers. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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