Since many of the leading economies in the world are in North America and Europe, these regions are the worst hit. East Asian economic giant Japan seems not to have been impacted. Emerging economic superpowers in the form of China and India have shown stable credit markets too. (Barrell & Hurst, 2008) As the U.S. financial markets are most closely linked to that of Europe in general and the UK in particular, the effect of the credit crisis is most acute on the latter. If the total losses induced by the current economic recession crosses $1000, then this will constitute a 7.4 percent contraction in US GDP. But other countries such as the UK will also be affected by this contraction since their banking institutions have invested in US mortgages. This means that other countries such as the UK are adversely affected as well. In the UK, although the losses have not measured accurately so far, it is a fair estimate that losses of 2-3 per cent of GDP have been incurred.
But even before the credit derivatives crisis took hold, the IMF gave out warnings through its World Economic Outlook reports. The report also made obvious that any crisis in the U.S. financial markets would have a cascade effect on the UK and beyond. For example, in the report released in 2008, months before the outbreak of the credit crisis, it stated that
"It is possible that falling house prices could induce US consumers to default on prime loans issued to good creditors with significant housing equity. It is also possible that default rates on credit cards and car loans could rise, but perhaps this is less likely as the short-term costs are perhaps higher. In addition it is possible that borrowers with negative equity in the UK and elsewhere might choose to default on their loans when house prices are falling and, if they did, banking sector losses could mount." (Barrell & Liadze, 2009)
Just as the recession was taking hold in the US, analysts predicted that there would be spill over effects on the rest of the world, including the UK. And so far, those predictions have proven to be true. The crisis triggered by the failure of credit derivatives in the US would affect other countries depending on which areas the losses affected and their impact on the banking system. At a time when the effects of global recession was on an ascendency, scholars Ray Barrell and Ian Hurst, noted that "if we spread the losses evenly then growth in the UK would also slow, this year and next, and we might see growth as low as 1.4 per cent this year and marginally lower than 1 per cent next year. On the same basis Euro Area growth might slow to around 1.2 per cent in each year. These falls could be compounded if there were domestic problems in these countries as well as in the US". (Barrell & Hurst, 2008) And economic data for 2009 and 2010 has vindicated their predictions, further underlying the fact that the UK economy is highly dependent on the fortunes and fluctuations of the American economy.
During the first phase of the recession, it is natural to see an increase in bank borrowing, as business corporations seek to utilize