Lloyds Bank predicts ‘mild recession’ for UK this year and tumbling house prices
Bonus pot rises to £446m but small number of customers ‘struggling to make ends meet’
Lloyds Banking Group has said it expects the UK to dip into a mild recession this year, as it braces for a fall in house prices and as mortgage lending continues to recover following September’s mini-budget.
It said it was focused on supporting its customers who will be “struggling to make ends meet” – as it increased its bonus pot for bankers to £446m last year, the highest amount dished out since 2018.
The forecast comes after an economic survey showed a surprise return to growth by businesses this month, raising the likelihood of another Bank of England interest rate hike in March.
The preliminary “flash” reading of the S&P Global/CIPS UK Composite Purchasing Managers' Index (PMI) jumped to 53.0 in February from 48.5 in January, above the 50 threshold for growth for the first time since July.
However, a separate survey for the Confederation of British Industry found that manufacturing output volumes fell in the three months to February at their fastest rate since September 2020.
Charlie Nunn, the group chief executive of Lloyds, said: “We are predicting what we call a mild recession – nothing like the financial crisis, more like some of the earlier recessions we had in the early parts of the century.
“For our customers, especially those at the lower income bracket in the UK who we know will struggle to make ends meet, we are focused on supporting them.”
The bank laid out its forecast for the UK economy this year, which includes the Bank of England’s base rate peaking at 4 per cent, and gross domestic product (GDP) declining by around 1.2 per cent before returning to growth in 2024.
It also expects house prices to fall by about 7 per cent this year, which would mean the value of average properties returning to levels seen in the third quarter of 2021.
But most of its homeowner customers would still have “very positive equity”, Lloyds said.
Mortgage lending has been gradually returning to normal levels since the former chancellor’s controversial mini-Budget, which led average two- and five-year fixed-rate mortgages to temporarily surpass 6 per cent.
We are laser-focused on mortgage customers that we know aren't in that higher income range and are going to experience an increase in interest income that will be difficult for them
After what Lloyds described as the “mini crisis”, hopeful new homebuyers retreated from the housing market, causing the value of total mortgage lending across the country to drop from about £1.5bn a day to just £600,000 a day.
These levels have since begun to normalise, but still remain around 30 per cent lower than pre-mini-budget levels, Lloyds said.
And the higher interest rate environment is expected to impact homeowners who are coming to the end of a fixed-rate mortgage this year, and having to remortgage onto a higher rate.
Mr Nunn explained: “If you look at the average mortgage customer in the UK, their average salary of about £75,000, and the average loan-to-value on our mortgage book is about 41 per cent – so there is really significant equity.
“This tends to be a customer base that is not struggling to make ends meet in terms of the cost of living.
“We are laser-focused on mortgage customers that we know aren’t in that higher income range and are going to experience an increase in interest income that will be difficult for them.
“But we also recognise that about 20 per cent of our mortgage customers are going to be repricing this year, as most have a fixed-term that goes through 2023.”
A significant proportion of customers have had to adapt their spending habits, including switching to supermarket value brands or cancelling subscriptions to deal with higher food and fuel costs, Mr Nunn added.
But less than 1 per cent of Lloyds’ customers are in serious financial difficulty and struggling to make ends meet, he stressed.
Meanwhile, the bank’s staff bonus pool increased by 12 per cent to £446m in 2022, the highest pot it has shared out among staff since 2018.
Chief executive Mr Nunn took home a total pay packet worth £3.8m for 2022, including a £1.3m shares bonus.
This is less than the £5.5m he picked up in 2021, although that included a £4.2m payout on taking on the role in lieu of share awards due from his previous employer, HSBC.
The group’s annual report showed plans for new long-term share awards for top bosses that could be worth a potential 300 per cent of salary – which would be a maximum of £3.4m for boss Mr Nunn on top of his pay package, if all performance targets are met.
Lloyds is the last of the UK’s biggest high-street lenders to share full-year earnings, all of which have reported strong financial results amid the cost crisis.
On Tuesday, HSBC reported a near-doubling of pre-tax profits to £4.3bn for the final three months of 2022 alone, compared with the previous year.
And NatWest saw its full-year pre-tax profits surge by more than a third to £5.1bn in 2022.