Every time anyone makes a forecast for the UK economy it seems more gloomy than the previous forecast. But, up to last week, all of the major economic forecasters had stopped shy of predicting recession. Not any longer. This morning saw the gloomiest forecast yet for the UK economy this year and next.

"British business is facing two very difficult years," began the latest economic report from the British Chambers of Commerce (BCC). It continued: "There is now a distinct possibility of technical recession."

The BCC report went on to predict that UK unemployment is likely to increase by some 250,000-300,000 over the next two to three years, and that the "golden rule", which prescribes that the government will only borrow for investment over the economic cycle, is very likely to be breached.

The BCC remedy: Interest rates need to be cut fast. "The longer the MPC waits before cutting rates, the bigger the danger that the situation will deteriorate, and the policy choices will become more difficult and unpleasant," said the BCC.

It gave a warning, however: "Government temptation to raise business taxes because it is running out of money, must be forcefully resisted."

David Kern, Economic Adviser to the BCC said: "Over the next two or three quarters, we expect UK GDP growth to be slightly negative or zero. Thereafter, we expect a shallow recovery, but the period of weak, below-trend, growth is likely to be prolonged, lasting until the final months of 2009 or early in 2010."

"Our view," he added, "is that the threats to growth are more serious and more immediate than the risks of higher inflation. The UK economy urgently needs an interest rate cut to counter threats of recession.

"Our central scenario envisages that the UK Bank Rate would be cut to 4.75 per cent in quarter four 2008, followed by an additional cut to 4.50 per cent in quarter one 2009."

It has been said here many times in recent months that, looking forward, deflation rather than inflation may prove to be a bigger challenge for the UK. And cutting interest rates may well be the right thing to do.

However, UK consumers need to reduce their debt exposure. Earlier this year data from the National Institute of Economic and Social Research revealed that the UK had the highest debt to income ratio of the G7. In the US, the wealth to income ratio is 2.52, compared to 2.18 in the UK. The UK's debt to income ratio is 1.23, compared to 1.16 in the US.

It is important that the UK's consumers are not encouraged to spend the UK out of economic crisis. Cuts in interest rates at a time of a shortage of credit will be no bad thing - after all, lower interest rates should at least reduce the cost of repaying debt.

But, lower interest rates are not the panacea for all our ills. The UK' s best prospect for sustainable growth in the longer-term lies with an export-led recovery. And the recent falls in the pound provide the perhaps the single biggest ray of hope for a UK recovery that we have yet seen.

It is funny, though, isn't it, how these economic forecasts lag so much behind what has been blindingly obvious for so long?

The media has been accused of talking the UK into recession - the reality is that because the media is not a slave to data, it has been able to apply common sense to the economic situation, and common sense has been warning of the very things the BCC is now talking about for months, if not longer.

©2008 Investment and Business News. All Rights Reserved.

Before we start, understand this: there are three stages in the property possession process. First the claim is issued; then the claim is made, and only then is the property taken in possession.

Here's the bad news. There has been a sharp rise in the first stage in that process - 2008 is now on course for being the second worst year since 1990.

Here's the good news. The second stage in that process has not seen such a big jump. As for the third stage, well, the data isn't out yet.

According to data from the Ministry of Justice, in 1991, 186,640 possession claims were issued. That was the worst year since the beginning of the last decade. The second-worst year was 1990, which saw 145,350. Halfway through 2008, however, the figure stands at 79,000, so if the second half of this year is like the first half, the total will hit 158,000.

Now, just because a claim has been made it does not mean the property will finally be taken into possession. For example, in 1991 when those 186,640 claims were made, just 75,000 properties were actually possessed.

And, of course, ultimately it is possessions that count. And in this respect there is good news. In the second quarter 28,658 mortgage possession orders were made on a seasonally adjusted basis, that's 24 per cent higher than in the second quarter of 2007 and 4 per cent higher than in the first quarter of 2008. But, if the second half of this year is like the first, total orders made will come in at around 112,000. That will be the worst year since 1994. But 1990, '91, '92, and '93 all saw higher figures than that.

Then again, all possessions start with a claim. So, possession claims issued give an indicator of the future. One assumes that if possession issues are rising now, then there will be a corresponding rise in orders made next quarter, and then a rise in properties taken into possession.

Capital Economics, however, said: "With households now having to wait for nine months before State benefits covering mortgage payments are paid out [in the event of unemployment] (compared to two months during the early 1990s), it is perhaps not surprising that lenders want to use a court action and the threat of possession as a wake-up call for borrowers who have fallen behind with their payments."

So maybe the rise in possession claims issued does not necessarily mean a sharp rise in actual possessions down the line. Then again, anecdotal evidence has suggested banks are less patient with late payments than they were in the early 1990s.

So it seems the data so far is inconclusive - but there is at least reason to believe possession levels are set to approach the 1991 level soon. The resulting rise in properties for sale will, of course, lead to an increase in supply of houses at a time of tiny demand - the result will probably be continued falls in house prices.

©2008 Investment and Business News. All Rights Reserved.

If there was a phrase to sum up the pre credit crunch period maybe it was this one: "retail therapy."

Spending money seemed to be the main purpose of shopping. The more we spent, the more we seemed to enjoy it, at least that's how it seems.

It is no wonder the UK ran up massive debts, our savings fell too low, and retailers boomed.

But, all of a sudden, savings is fun; at least that’s what the Yorkshire Bank/Clydesdale Bank has found.

The survey of more than 2000 UK adults by Yorkshire Bank/Clydesdale Bank has discovered that the ’spend now, pay later’ culture associated with cheap, easily-available credit has changed. More people are enjoying the satisfaction of 'saving now, buying later’. A whopping 77% per cent of Brits agree that paying for a high-value item is more satisfying when they have saved for it, than when purchased spontaneously using borrowed money. What’s more, 84 per cent of people cherish or enjoy items that they have saved for more than items purchased spontaneously with borrowings.

Psychological expert Phillip Hodson explains that, paradoxically, people are often happier in times of austerity. “You would assume we all prefer instant gratification to the perceived pain of waiting to fork out in full for a summer holiday or new TV. But more generally the opposite is true. It is a well known psychological trait that delayed gratification can generate a deeper sense of happiness - we might call it 'saver satisfaction’ or the 'joy of thrift’ - than buying on whim. Yearning makes the heart grow fonder.

“Most big item purchases like cars and fancy music systems lose their novelty fairly quickly, even more so if they go wrong. But items which we have dreamed of being able to own for a long period create a stronger emotional bond which is much more difficult to break. Even if the purchase was less than a bargain we remain invested in it. The sense of achievement that comes from the discipline of saving also makes us feel morally stronger and in greater control.”

And so there it is. Once again human nature exaggerates the tide. When the economy is booming, we just wait to spend. Now we just love to save. That's why we have such extreme peaks and troughs in the cycle - it's called human nature.

©2008 Investment and Business News. All Rights Reserved.

Failure surely is the price we pay for our errors. If we don't pay a price, then what incentive do we have not to repeat those errors?

Now former Fed chairman Alan Grenspan has entered the debate.

Mr Greenspan told a US newspaper that the Fed and the Treasury “should have wiped out the shareholders, nationalised the institutions with legislation that they are to be reconstituted as five or 10 individual privately-held units,” which would eventually be sold off.

It is a tad ironic. While at the Fed Mr Greenspan didn't actually do the bail out, but he did orchestrate a rescue of Long Term Capital Management, so that the hedge fund that messed up so spectacularly never actually went bankrupt.

Maybe it was because US banks never actually suffered sufficiently for their recklessness in the mid 1990s, that they went on to repeat the same mistakes this decade.

But at least Northern Rock did actually fail in the end. The UK government did receive all kinds of flak for the Northern Rock debacle, but surely some kind of bail out, preserving the bank, would have sent an awful message to the other banks.

History tells us that the failure of banks can have a catastrophic effect upon the economy.

The economic depression in the US of the 1930s was partly the result of mass banking failure. More recently, Sweden, for example, suffered a major banking crisis in 1991 - and the cost to the economy - 6 per cent of GDP; further back in 1987 it was Norway that was struck, and the cost - 8 per cent of GDP. But in 1997, it was Spain which felt the horror of a full-scale banking crisis - and the cost, 16 per cent of GDP. Examples of other major banking crises include France (1994), Germany (1977), Japan (1992), the US (1984), but top of the order comes the UK (1974, 1991 and 1995). (data supplied by NIESR 2008.)

But things go in circles. Bank failure has in the past caused economic crisis. Maybe, this time around, not enough banking failure has caused this crisis.

©2008 Investment and Business News. All Rights Reserved.