THIS WAS the year the credit crunch hit the high street, as the financial contagion that sprang from the subprime mortgage market in America finally spilled over into the real economy.

Just ask any of the 28,000 Woolworths staff who lost their jobs in the countdown to Christmas. Or the 1,200 MFI employees who joined them on the dole queues.

As the global economy hurtles into recession, the UK high street is suffering its most difficult trading conditions for at least a quarter of a century. Within the first few months of 2009, or perhaps weeks, many more retailers, large and small, look destined to share the fate of MFI and the 99-year-old Woolworths chain as they lose the struggle to survive.

The thousands of jobs lost from the retail sector will fuel a rise in unemployment to three million next year, but other sectors, particularly the automotive industry and housebuilding, are also being hit.

Gordon Brown's government has invoked the spirit of John Maynard Keynes and is aiming to spend its way out of recession. But the scale of debt being taken on to fund the spending is alarming - it will leave the nation's deficit at 8 per cent of gross domestic product, its highest level since the war.

One of the key planks of the government's plan, unveiled in the pre-budget report, was a £12.5 billion VAT giveaway, cutting the rate from 17.5 per cent to 15 per cent. But this has done nothing to encourage shoppers, who are fearful of losing their jobs and having their homes repossessed.

Thus the state of the high street reflects the rapidly deteriorating health of the UK economy. Everyone knew it would be tough in 2008, but no one - from the highly paid economists in the City to the now redundant staff who once served pick'n'mix at Woolies - could have predicted the seismic scale of the global financial crisis.

When the bells rang in the new year, the credit crunch was already five months old. It had claimed its first high-profile British victim - mortgage lender Northern Rock - and markets were wary of more subprime shocks to come.

Consumer confidence was fragile - house prices were falling and household budgets were tight. Recession was looming over America, but most economists - and the government - believed the UK would escape the same fate, suffering only a slowdown instead.

But as the financial crisis spiralled out of control, sending stock markets into freefall and bringing the banking system to the brink of collapse, it became apparent that not only was a global recession unavoidable, but the UK economy would be among the hardest hit.

The shocks came thick and fast - as oil prices careered towards almost $150 a barrel in July, petrol prices and utility bills rocketed, putting further strain on already stretched household finances.

Commodity prices soared, pushing up food prices and fuelling inflation at an alarming rate. As other central banks cut interest rates in an attempt to stimulate their economies, the Bank of England focused instead on inflation, leaving rates on hold.

Although inflation remains well over double the government's 2 per cent target, it is expected to fall rapidly on the back of the oil price plunge. Thus deflation, rather than inflation, is the risk now. While a short period of falling prices would be good news for the economy and would stimulate demand, any prolonged bout of deflation would be extremely damaging. It would have a particularly brutal effect on over-borrowed British consumers, as it would push the real value of their debts even higher.

With interest rates now at a 57-year low of 2 per cent, and widely expected to approach zero within months, policymakers would have little room for manoeuvre.

There were some good times in 2008 - in the summer, the pound was still riding high at over $2, encouraging thousands of bargain-hunting Brits to fly to New York for shopping sprees. Now, however, as the outlook for the UK economy deteriorates further, sterling has lost one-quarter of its value against the greenback and is heading towards parity with the euro. That makes holidays more expensive and will push up prices of imported goods.

There were some heroes this year, although many more villains. "Respected financier" has almost become an oxymoron, and bankers have joined estate agents, politicians and journalists at the top of the list of most reviled professions.

Very few in the world of finance have had their reputations enhanced by the events of 2008. But if there was a good guy, it was David "Danny" Blanchflower, the one member of the Bank of England's Monetary Policy Committee who repeatedly argued interest rates should be cut sharply if recession were to be averted. By the time his fellow committee members acted, including Bank of England governor Mervyn King, it was too late.

The impact of the crisis on the markets is clear to see, from the destruction of value in the banking and financial sectors, and the stock market as a whole, to crumbling house prices, rising repossessions and insolvencies and rising unemployment.

Consumers are in a state of shock too, as the world of high finance impinges on almost every aspect of their lives.

They have been battered and baffled with a lexicon of jargon, from toxic loans to Libor, SIVs, Pibs, CDOs and short-selling. Once upon a time, "crunch" was something you did with an apple - now the phrases "credit crunch" and "subprime" have entered the Concise Oxford English Dictionary.

Fiona Walsh writes for the Guardiannewspaper in London