The intensification of the banking crisis in September and October has had a severe impact on the flow and availability of credit and this has significantly dampened prospects for economic growth. Even before the height of the crisis, lending growth to the non-financial private sector had slowed very sharply. Since September we have increasing anecdotal and survey evidence that credit is being rationed very tightly and this is now materially impacting firms' output, employment and capital spending decisions. Indicators of activity and employment have weakened rapidly as a result.
Although the government financial assistance plan should help ensure banks' funding needs are met, money markets are still not functioning properly. Until they do, credit conditions will remain extremely tight. Despite the rapid policy intervention we have seen so far, a deeper and longer lasting recession is now expected, representing a sizeable downgrade to our last forecast.
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