Lloyds' gloomy message on UK recovery is based on more than pessimism | Larry Elliott


Way back, when Britain had a much bigger industrial base than today, ICI’s results were seen as a sign of how well things were going. Times change and these days it is not a manufacturing giant like ICI but a high street bank that has taken on the role of the economy’s bellwether.

If what’s happening at Lloyds Banking Group really is a reflection of what is happening to the UK as a whole – and there is a good argument for saying that it is – there is plenty to be concerned about. Lloyds has a big presence in the mortgage market, car loans, credit cards and business lending. It is almost entirely UK focused.

So when the bank says that one reason for increasing its provisions against future losses is the heightened risk of mortgage default, that should start alarm bells ringing in the Bank of England and the Treasury. Likewise the fact that many of the companies that have taken advantage of the government’s bounce-back loans have left the balances in their accounts.

Nobody expected the Lloyds Bank results for the second quarter to be anything other than dreadful, and those predictions were duly confirmed by a pre-tax loss of £676m. What Rishi Sunak and Andrew Bailey would have been hoping for was some evidence of a strong bounce back in the second half of 2020.

In truth, there is not much evidence of that. Lloyds is gloomier about growth, unemployment and house prices than its rival Barclays, and sees a risk that a rise in unemployment as the Treasury’s furlough scheme is wound down will lead to greater mortgage distress.

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Those of an optimistic bent might say that Lloyds has always tended to take a conservative view when it comes to provisioning and that there is a chance losses will not be as big as it expects. But companies are stashing away their bounce-back loans for a reason; they fear a tough winter ahead.

US recovery runs out of steam

Forget the Great Depression. Don’t even consider the Great Financial Crisis of 2008. The US economy has just suffered its worst three-month period in its history, contracting at an annual rate of more than 32%.

That doesn’t mean that the world’s biggest economy is going to shrink by a third this year. Due to the curious way in which the US presents its growth numbers, the hit to activity between April and June was in the region of 8% of GDP, slightly smaller than Germany’s 10% drop.

The US growth figure – in line with what economists had been predicting – overshadowed the release for new jobless claims. These rose for a second week and provide a better picture of what’s happening to the US economy right now. They suggest a recovery that began in May has run out of steam.

The reason is obvious. The number of new cases of Covid-19 has more than doubled in the past six weeks and is running at 70,000 a day. With the number of deaths up from a daily low of 490 in early July to more than 1,000, restrictions have been tightened and consumers have stopped spending. A slowing economy and rising unemployment is the result. Not what an incumbent president would want with an election three months away.

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Homes for the high street

In a sign of things to come, the group behind the John Lewis and Waitrose brands has announced that it is thinking about turning some of its unwanted retail space into housing. The deli counters will become master bedrooms, the trolley parks bike racks.

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It’s the right approach, and certainly has a better chance of reinvigorating town centres than the online sales tax currently being considered by the Treasury. The idea that a structural problem that long predates Covid-19 can be solved by making shopping at Amazon more expensive is moonshine.

A much better solution is to turn town centres into places where people live, socialise and spend money. That means fewer big supermarkets and department stores – and more homes.



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