With so much fog surrounding the outlook for the UK economy, earnings statements from the country’s major commercial banks this week provided an ideal opportunity to make sense of things, as big lenders tend to have a good idea of what what is happening in the field.
The general picture painted – and this is a huge generalization – is one in which UK households and businesses are becoming increasingly cautious about the outlook for themselves and the economy more generally, but, for now , do not suffer from financial difficulties in the majority of cases.
This was confirmed by the relatively low levels of writedowns made by banks this week in anticipation of a deterioration in the economy.
Lloyds Banking Group, the UK’s largest provider of mortgages, current accounts and savings accounts, took an impairment charge of £377million in the first six months of the year, which, he pointed out, still meant that its overall provisioning on an underlying basis was lower than before the pandemic.
Santander, the UK’s third-largest mortgage lender, also recorded credit impairment charges of £118m during the period, due to a deteriorating economic outlook, but noted that “we don’t have seen no material deterioration in credit quality to date.”
Barclays, owner of the UK’s largest credit card provider, Barclaycard, meanwhile set aside a relatively small £48million for its UK business, noting that to date, he had seen a low number of loans become delinquent, “improving UK employment data and reduced uncertainty about the possible effects of COVID-19, offset by heightened concerns about the vulnerability of customers to high inflation.
Meanwhile, NatWest, the UK’s largest small business lender, has actually released some £46million in provisions for bad debts.
Alison Rose, chief executive of NatWest, told Sky News today: “What we are seeing at the moment is no signs of distress among our customers.
“We are watching this very closely, both households and families, as well as businesses, and there are good cash reserves, people are very resilient – but we know that difficult times lie ahead.”
This word resilient has cropped up several times this week. Lloyds chief executive Charlie Nunn repeatedly stressed in his call with City analysts on Wednesday the resilience of the bank’s customer base.
And Coimbatore Sundararajan Venkatakrishnan, Barclays’ new chief executive, also spoke of a resilient performance on Thursday.
He told analysts: “We continue to monitor customer and customer behavior very carefully.
“Given heightened concerns about an affordability crisis, to identify warning signs, we have yet to see any worrying indicators – and payment rates continue to be high as customers have reacted rationally to the economic environment.
“As a result, card balances in the UK and US are down from pre-pandemic levels on a local currency basis, although the latter has started to grow again this quarter, and we believe that the quality of these books is higher than before the pandemic.”
So far so good, then.
But these results only tell the reader what happened in the first half of the year. The question is what happens for the rest of the year.
“We remain attentive to signs of weakness”
Here, the bankers’ crystal ball is sometimes a little cloudy, but it is clear that none of them seem to be expecting a recession in the United Kingdom in the second half of the year, rather a slowdown in growth.
Mr Venkatakrishnan said: “There is an anticipation of a shift in the real economy, which we haven’t seen yet. And we remain alert to signs of weakness, even as we start from historically low levels of unemployment and credit distress.”
This was also noted by Nunn, who said that if customers adjust their spending, it has the effect of improving their financial resilience.
Mr Nunn, who reminded his audience that Lloyds customers tend to be wealthier on average than most Britons, added: “It should be noted that on average customers are entering this period in better financial health than before the pandemic, having increased their savings pots and reduced their debt.”
“We are seeing growth but slower growth”
The fact that many households do not yet appear to have used up the savings they have been forced to build up during the pandemic – estimated at £195billion by the Office for National Statistics – is something that seems to give banks a certain comfort because of the way they can react in the event of a sudden slowdown.
The same goes for the very low unemployment rate and the record level of job vacancies in the economy.
Ms Rose said: “We continue to see growth but slower growth. This post-pandemic recovery is really now what we’ve seen in terms of a strong recovery, but certainly with the headwinds ahead, we’re anticipating weaker growth.
“We have a very interesting dynamic in the UK – very high employment and very high vacancies, which underpins the robustness of the economy. But weaker growth as we move forward, as people face the challenges of economic uncertainty. We think it’s lower growth as we go forward.”
It said a sign that things were getting worse would be an increase in customer calls to its call centers or weaker household or business spending indicators.
That’s not to say the country’s top bankers are ruling out a recession next year.
Santander UK published a fascinating chart in which it sketched out five different scenarios for the economy, one of which – to which it applies a 20% probability – will see it contract by 3.3% next year, with conditions likely to cause such a situation, including a weaker environment for business investment due to political uncertainty, new strains of COVID-19 and a larger than expected negative impact of the trade agreement with the EU due to continuing tensions over border controls between Great Britain and Northern Ireland.
Surprisingly, in four of these five scenarios, Santander UK expects house price inflation to turn negative in 2023, but not before.
“A soft landing” for property prices
Mike Regnier, managing director of Santander UK, told Sky News: “Most of our scenarios say this, but our base scenario, where we have a 40% weighting, we don’t expect prices to real estate declines, but to a soft landing towards the end of the year.”
The overall picture is therefore one of cautious optimism. The outlook for the UK economy as a whole is that activity is set to slow – but a recession is seen as largely unlikely this year – as households, armed with the savings cushion built up during the pandemic, pull their horns in anticipation of higher energy bills in particular.
That said, Vladimir Putin’s war in Ukraine has made life harder to predict than ever, as has the possibility of further COVID outbreaks and further rows with the EU over Northern Ireland.
Bankers will need to show courage to help households and businesses through these troubling conditions.
The good news, as it stands, seems to be that they think their own balance sheets are strong enough to do this.