THE UK economy is entering the eye of a storm as banks around the world are bailed out amid consumer panic, and families and companies feel the icy blast of the credit crunch at their doors.
Governments will need to steer a wary course if we are to survive the hurricane of rising unemployment, tumbling house prices and falling living standards ahead.
But they are at least, if belatedly, beginning to act, and if they take the right d
ecisions we may look back on this weekend as our darkest moment.
On Friday, after a week of chaos, as panic-stricken savers moved their money from savings institution to institution on the slightest rumour, the UK Government stepped in to announce that, from Tuesday, savings of up to £50,000 will be guaranteed.
And all eyes are on this week's meeting of the Bank of England's rate-setting committee as hopes grow of a cut in borrowing costs.
The increase in the deposit guarantee, though widely expected for many months, was largely rushed through to stop money flooding to Ireland, after its government guaranteed all deposits.
The Irish move could not have come at a worse moment for the UK, where the credit crunch poison had begun to spread well beyond the financial sector. Ford at Southampton moved onto a four-day week, Bentley is on a three-day week, and Land Rover has scrapped Friday production. Even Toyota has suspended the night shift at its Derby factory.
This followed more bad news in the financial sector after Bradford & Bingley was taken into Government ownership and its savings book sold off to Santander.
Martin Currie's chief investment officer James Fairweather says: "Over the past couple of weeks we have seen the complete drying up of liquidity worldwide. Business can't work without credit and we are already seeing companies cutting back because they can't access finance."
Consumers were left feeling even worse off when the latest property data from the Nationwide showed homes were worth on average £23,000 less than a year ago, although Scottish price falls were more muted.
Stock markets continued to buck like a runaway stallion, leaving investors wondering whether their cash might be better off under the mattress or in gold.
Money flooded into Government-backed institutions such as National Savings & Investments and, ironically, the disgraced bank Northern Rock, which had to slash its rates to turn business away.
Many building societies saw money pouring through their doors, as did some Irish banks such as Anglo Irish.
But concerns are mounting that blanket guarantees to cover all deposits, like those offered in Ireland and also by Greece, will exacerbate credit shortages in the UK, leading to even more job losses.
The need for unanimity in deposit guarantees across the EU will have been high up the agenda at yesterday's emergency summit of European heads of state in Paris.
Building Societies Association director general Adrian Coles says:
"There is increasing pressure on the EU to come up with the same level of depositor protection throughout Europe, because otherwise funds will simply wash from country to country, which could make matters worse."
So acute have fears about jobs and the future become that Fairweather predicts the dithering will have to stop and solutions found.
He said: "This situation can't be allowed to continue, and if there is a positive sign it is that we are beginning to see coordinated actions by central banks. Confidence can then be stabilised, and equity and bond prices will also steady."
But although the recovery may then have begun, the pain will worsen for many months to come, as unemployment rises and property prices fall.
Standard Life's head of global strategy, Andrew Milligan, says: "We are facing a very weak economy until at least the summer of next year."
And Scottish Value Management's Colin McLean adds: "In a year to 18 months we should be out the other side, but there will be some difficult times until then."
Fairweather warns that even when recovery begins, consumers may hardly notice the difference: "In time we will move onto the next stage, but it could be one of slow growth and more regulation. So the recovery will have begun, but it could be a painful protracted recovery."
Wild ride to go on for investorsINVESTORS were forced to endure another white knuckle ride last week, after watching the value of their pensions plunge £180bn since a year ago, writes Teresa Hunter.
At one point investors could have been forgiven for wondering if their retirement funds were going to be wiped out as markets lurched south.
Yet the FTSE index of 100 leading shares on Friday closed at a reassuring 4,980.25, after its dive towards 4,600 on bad news from America.
But savers want to know how long they must wait to see their investments recover. While no one knows, markets have the endearing characteristic of becoming optimistic and beginning to rise just as rigor mortis sets in for the rest of the economy.
This is because they look forward and predict the future. They can see news, bad and good, not visible to the naked eye. If we are lucky the worst will be over long before we are out the other side of the recession, which may take 18 months.
However, as companies tighten their belts, this can hardly be good news for share prices. Therefore many analysts expect markets to remain jumpy for at least the foreseeable future.
Standard Life's head of global strategy Andrew Milligan says: "The stock market has already priced in a significant amount of bad news, and much will depend on whether we can create a positive environment and when we can restore confidence.
"It is possible we have seen the trough in prices but it is too early to say whether the bear market is over."
Colin McLean, managing director of Scottish Value Management, says: "The efforts of the central banks will help but there is still a great deal of debt in the economy which will have to be unwound."
Martin Currie's James Fairweather says markets may perk up sooner rather than later. "Central banks are making the right moves and they are starting to put confidence back in the banking systems. Once the level of risk is perceived to have fallen then confidence will return to equities. Companies will be able to borrow again, and the wheels of business can begin turning normally."
McLean adds: "People are sitting on a great deal of cash and at some point that will go back into the market and we will see a sharp rally."
Interest rate cut unlikely to help housing marketLOWER mortgage bills could soon be on the way if the Bank of England cuts interest rates on Thursday as expected, but house prices will continue falling for many months yet, writes Teresa Hunter.
The monthly cost of a £100,000 home loan could fall by £16 if rates are cut by 0.25%, as many commentators predict. Some go further and are calling for an urgent 0.5% reduction. Although less likely, this would trim the monthly cost of the same loan by £31.
It is not clear how banks and building societies will react after the much called for rate reduction. Swap rates, on which fixed rate mortgages are based, fell last week by 0.2%, indicating markets believe a trim is on the cards.
But as the wholesale markets froze, following bank collapses, the cost of raising money on the three-month Libor market, on which other mortgages are priced, rose significantly, reaching 6.3% on Wednesday before easing slightly to 6.27%.
This may leave some institutions scant room to pass on lower rates to customers, and some experts fear they may even go up.
John Postlethwaite, at Punter Southall in Edinburgh, says: "I am concerned that lenders would see lower rates as an opportunity to push up their profit margin."
Charcol's Ray Boulger adds: "Tracker rates will fall immediately, so existing tracker customers will be better off. But the margins on new trackers could go up. "
Indeed, the Bank of England last week warned that credit will become even more difficult to get in the run-up to Christmas.
Despite the fall in swap rates, the Nationwide increased the price of some of its fixed deals by 0.2%.
Nevertheless, Moneyfacts' Darren Cook says: "There are clear signs the market expects the Bank to act, and many lenders will cut their mortgage rates if it does."
Indeed, so dire are the prospects for the economy that many observers expect interest rates to fall sharply next year. Capital Economics believes they will fall to at least 3.5%, which could push mortgage rates down from their typical level of 6.5%-7% to as low as 4.5%-5%.
Capital's property economist Kelvin Davidson argues: "The crisis is becoming so serious that rates may have to go below 3% to get the economy moving again."
The property market meltdown shows no sign of abating, with new lending dropping by a catastrophic 95%.
Values fell by 12.4% year-on-year across the UK last month, although Scotland fared better with prices sliding just 5%, according to Nationwide. Edinburgh was one of the best-performing locations, down 3%, compared with an 8% dive in Glasgow.
However, the perennially pessimistic Capital Economics is cheery about the prospects for the Scottish market. Davidson predicts: "Scotland is better placed on every measure to escape relatively lightly from the housing market slump. We believe prices will fall less north of the Border than many other areas of the UK."
Yet Scottish house price deflation is speeding up. Nationwide pointed out that when the last quarter's data was examined in isolation, Scottish prices had fallen faster than the UK average of 4.6%.
There are two big unknowns. Firstly, what will happen to jobs, and therefore demand for property, in the wake of the HBOS merger with Lloyds TSB?
The second big question mark hangs over the buy-to-let market. SVM managing director Colin McLean believes the signs are ominous. "If you have four or five buy-to-let mortgages with Bradford & Bingley, you should expect to see the cost rise, in the same way Northern Rock borrowers saw their mortgage bills climb when the bank was nationalised."
