Darling Says Global Credit Crunch `More Profound' Than Expected

By Gonzalo Vina and Paul George

July 22 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling said fallout from a global credit crunch is proving worse than previously expected, a sign that U.K. policy makers are bracing for slower growth.

``The effect of what has happened is going to be far more profound than people predicted even at the turn of this year,'' Darling said in an interview with Bloomberg Television, which will air excerpts today. ``It is quite clear that if you look during the course of this year, conditions have become more difficult across the world.''

The finance minister, whose tenure has coincided with the sharpest decline in house prices and the steepest rise in living costs in a decade, reiterated his belief the British economy will escape recession and pledged to keep up the fight against inflation.

The deteriorating economic outlook, together with a run on deposits at Northern Rock Plc in September and a series of U- turns on tax policy, have eroded Prime Minister Gordon Brown's popularity. Darling won't release new economic forecasts until his pre-budget statement in the fourth quarter.

Britain's economic growth will probably slow to 1.6 percent this year and 1.3 percent in 2009, the weakest since 1992, according to a survey of 40 economists by the Treasury released on July 16. In March, Darling expected growth of up to 2.25 percent this year, compared with 3.1 percent in 2007.

Slower Growth

The Bank of England has already presented a more somber outlook. Governor Mervyn King said then that there may be ``an odd quarter or two of negative growth.'' His deputy, John Gieve, said policy makers must grapple with inflation ``well over'' 4 percent, double the government's target.

The central bank expects growth to slow to 1 percent in the first quarter of 2009. Consumer prices climbed 3.8 percent in June from a year earlier, the most since records began in 1997.

House prices fell the most in 15 years in June as higher borrowing costs reduced mortgage lending, triggering the worst property slump since Britain's last recession in 1991, according to HBOS Plc, the U.K.'s biggest mortgage lender.

``Times are tough,'' Darling said in the interview, which was recorded July 14. ``They are tough for everyone.''

The Conservative opposition had a 22 percentage point lead over Labour in a YouGov Plc survey published on July 13. Forty- six percent of people predicted a recession in the next year, compared with 31 percent in June, YouGov said in its survey of 1,800 people. Brown has until June 201o to call the next election.

Tax Cuts

In May, Darling announced a 2.7 billion-pound ($5.4 billion) emergency tax cut for 22 million people and last week postponed for six months an increase in fuel duty to cushion the effect of record oil costs.

In the interview, Darling said the worst of the credit crisis is far from over, noting action to prop up the mortgage lenders Freddie Mac and Fannie Mae in the U.S. In Britain, Alliance & Leicester Plc agreed to be acquired by Banco Santander SA of Spain for 1.26 billion pounds, less than half of its market value at the end of last year.

Worldwide, banks and securities firms have raised $324 billion in the past year after record writedowns and credit losses of almost $410 billion from the collapse of the subprime mortgage market, according to data compiled by Bloomberg.

``I don't think anyone would be wise to start speculating on how long the present difficulties will last,'' Darling said. ``We are dealing with them here and other countries are dealing them as well. If you look at the problems the banks have had, they have moved into a different phase and governments have to take account of that.''

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.netPaul George in London at paulgeorge@bloomberg.net;