Strikes drag UK economic growth to a standstill; mortgage defaults rising as households struggle – business live | Business

UK lenders have recorded a rise in households defaulting on loans over the past three months, according to new data from the Bank of England.

The BoE’s Credit Conditions Survey found that default rates on secured loans to households, such as mortgages, increased in the last quarter, and were expected to increase further in Q2.

It’s the same picture for unsecured lending, with lenders reporting a rise in defaults on both credit cards and other unsecured loans in December-February, and a further increase expected in March-May.

More small companies are defaulting on their borrowing too, the BoE says:

Lenders reported that default rates on loans to both small and medium-sized corporates increased in Q1 and was expected to increase further in Q2.

Default rates on loans to large businesses was unchanged in Q1 and was expected to remain unchanged in Q2.

The Credit Conditions report also foud that lenders expected to cut the availability of secured credit over the next three months, suggesting it could be harder to find a mortgage.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says:

‘’Watchful eyes are on any sign of credit conditions tightening as a result of the banking crisis which erupted in March, and the environment in the run up to the turbulence showed that lenders were already becoming more risk averse. The interest free loan periods available for credit cards decreased in the first quarter of the year and are expected to narrow further. It’s little surprise that lenders were tightening up, given that default rates for unsecured lending had already increased during the first few months of the year and were expected to lift again towards the summer. Lenders were already expecting that there will be less secured credit available for home loans during the Spring months. A squeeze in lending to big firms wasn’t expected in the second quarter, although this may be because demand for credit from larger corporates had decreased at the start of the year.

Due to the lag effect of the banking crisis, it’s too early to establish just how much the picture will have changed, but central banks are bracing for a further tightening of credit conditions. This was clear from the latest Fed minutes and from the most recent comments from the governor of the Bank of England. The repercussions from the collapse of Silicon Valley Bank are expected to tip the US economy into a mild recession, and the Bank of England is also concerned that the rapid nature of recent bank runs may mean lenders will have to increase their capital buffers even further to protect themselves, in addition to the cushions they have built up since the financial crisis. Banks have benefited from high interest rates which have boosted their net income margins, but as stormier weather approaches and the need to attract in more deposits rises, those net income margins face a squeeze.’’

Over in the eurozone, industrial output has roared back.

Factory output in the eurozone rose at its fastest pace for six months in February, increasing by a faster-than-expected 1.5% during the month.

That beats forecast of a 1% rise, and suggests Europe’s economy has started 2023 more strongly than expected.

Bert Colijn, ING’s senior eurozone economist, says:

Today’s numbers suggest that fading supply chain problems have helped industrial output improve recently. Expect production to contribute positively to first-quarter GDP.

The improvement in production in February was broad-based but led by Germany which saw production increase by 2.1%. Out of the larger economies, only Italy saw a small decline of -0.2%. All production categories also experienced higher output.

TSB Bank’s former chief information officer Carlos Abarca has been hit with an £81,620 fine over the bank’s botched IT migration five years ago.

The Bank of England said on Thursday it had fined Abarca for failing to adequately manage the migration to new IT systems in April 2018 which led to disruption for millions of customers.

Abarca was penalised under the UK’s Senior Manager Conduct Rules, which were brought in after the 2008 financial crisis to hold top bankers more accountable.

Sam Woods, the BoE deputy governor in charge of the central bank’s supervisory arm, the Prudential Regulation Authority, says:

“The PRA has fined Mr Abarca because his management of a key outsourcing relationship fell below the standard we expect.”

TSB’s migration of its corporate and customer services to a new IT platform in April 2018 led to immediate technical failures, and disruption to banking services, including branch, telephone, online and mobile banking.

It was one of the worst IT meltdowns in many years.

Small businesses were unable to pay salaries or manage transactions, while some account holders found all their direct debits had disappeared and others reported that their cards were declined when shopping.

All of TSB’s branches and a significant proportion of its 5.2 million customers were affected by the initial issues, which weren’t completely resolved intil December 2018, the BoE says.

Today’s ruling says that Abarca did not:

• ensure that the third party’s ability and capacity were adequately reassessed on an ongoing basis;

• ensure that TSB obtained sufficient assurance from the third party in relation to its readiness to operate the new IT platform; and

• give sufficient consideration to whether further investigation was required before giving assurance to the TSB Board as to the third party’s readiness for migration.

The PRA said Abarca agreed to resolve the matter, and therefore qualified for a 30% reduction in the overall fine, which would otherwise have been £116,000.

Last December, TSB was fined £48.65m by City regulators over the botched migration, and has paid £32.7m in redress to customers who suffered detriment.

Industrial action also subdued the economy in March, points out Moody’s Analytics economist Barbara Teixeira Araujo.

This means that the economy probably flatlined in the first quarter of this year, Teixeira Araujo predicts. But, Moody’s does forecast the economy will grow this year.

She writes:

“The U.K. economy held flat in February, with the sectoral breakdown details showing that it was actually the construction sector that saved the day, as a sharp 2.4% m/m rebound in building activities offset falls in each production and services output.

However, were it not for February’s strikes—especially within civil service and amongst teachers and university lectures—services sector output, and by extension GDP, would actually have risen.

Looking ahead, broad-based industrial action also took place in March, which should keep a lid on first quarter’s GDP. Consequently, we are expecting activity to basically flatline in the January-March quarter.

And the economy will only slowly recover thereafter, as still-high inflation and extremely-tight financial conditions are expect to keep on holding back growth. While we expect that an outright recession will be avoided in 2023, growth should clock in at only 0.4%, down from 4.1% in 2022.”

The combined forces of industrial action, aggressive monetary tightening and stretched household budgets mean the UK economy is struggling to find any real momentum, says Investec economist Ellie Henderson.

She says the UK economy needs a restart as growth is likely to continue to flatline, after stalling in February.

The impact of the headwinds on the economy were made clear in the report, particularly that of industrial action, Henderson explains:

Services output was the major drag on economic activity in February, declining by 0.1% on the month and within this it was sectors most affected by strike action that contributed most significantly to the contraction.

For example, education output declined by 1.7% on the month, following teachers walking out over pay during February, as did public administration output, which fell by 1.1%, again a sector plagued by industrial action. Even a 0.4% rise in consumer-facing services, which includes retail trade, – a sector that we suspected would perform well as guided by a buoyant retail sales report in February – was not large enough to offset the declines elsewhere.

Henderson cautions that industrial output was not particularly inspiring either, contracting by 0.2% on the month, while builders were busier:

It was construction output that saved the day, with the 2.4% bounce on the month preventing an outright contraction in GDP in February. This was helped by the warmer weather but should also be considered in the context of a 1.7% fall in January.

Full story: UK economy flatlined in February amid impact of strikes

Richard Partington

Britain’s economy recorded growth of 0.0% in February as a wave of public sector strikes weighed on activity, offsetting a recovery in consumer spending despite the cost of living crisis, our economics correspondent Richard Partington writes.

The latest figures from the Office for National Statistics (ONS) show the economy ground to a halt in February, falling below City expectations for a 0.1% month-on-month rise in gross domestic product (GDP), the total value added by the production of goods and services across the economy.

It follows growth of 0.4% in January, as revisions to earlier estimates pushed the economy back above pre-pandemic levels. However, the UK’s recovery to pre-Covid levels remains slower than that of any other G7 economy.

The ONS said construction grew strongly after a poor start to the year with increased repair work taking place, alongside a boost from retail as many shops had a strong month for sales.

However, it said this had been offset by civil service and teachers’ strikes, hitting activity in the public sector, while unseasonably mild weather led to a fall in the use of electricity and gas. Manufacturing showed zero growth, while the UK’s dominant services sector fell by 0.1%, down from a revised growth rate of 0.7% a month earlier.

The figures come hours after Jeremy Hunt insisted the UK would do “significantly better” than the International Monetary Fund’s forecast on Tuesday that the economy was expected to shrink by 0.3% this year.

Speaking to Bloomberg News on the sidelines of the fund’s spring meetings in Washington on Wednesday night, he said:

“We will do better than that.”

Here’s the full story:

The London stock market has opened quietly this morning, as traders digest today’s UK GDP report.

The FTSE 100 index has dipped by 3 points to 7821, having closed at a one-month high yesterday.

Housebuilders Taylor Wimpey (+2.2%) and Barratt (+2.2%) are leading the risers, after HSBC lifted its price targets on their stock, followed by Tesco (+2%) despite its drop in profits last year.

Victoria Scholar, head of investment at interactive investor, explains:

Investors are weighing up an improving picture for US inflation with the latest data falling to 5%, a two-year low versus fears of a recession stateside after minutes from the Fed’s latest meeting indicated that US central bank policymakers are concerned about the negative economic fallout from the recent turmoil in the banking sector.

US weekly jobless claims and producer price inflation data are in focus today as well as Wall Street earnings which kick off tomorrow with some of the biggest US banks due to report.”

Tesco profits halve amid ‘incredibly tough year for customers’

Sarah Butler

Profits at Tesco halved last year to £753m in what the grocer called an “incredibly tough year for customers” as it battled “significant operating cost inflation” and wrote down the value of some properties.

The UK’s biggest retailer said sales rose 7.2% to £65.7bn in the year to 25 February, including a 3.3% increase at its UK supermarkets, but it had sold fewer items as shoppers chose carefully, to manage budgets under pressure from price rises.

Sales of food in the UK rose 4.6% in the year, led by the group’s own-label ranges, with sales of its premium Finest range up nearly 7% and its cheapest “Exclusively at Tesco” range up 6%.

However, the retailer said the volume of items sold had fallen, partly as its customers adjusted behaviour amid easing Covid restrictions, buying less to eat at home because they were visiting restaurants and cafes more often.

Sales of homewares and clothing also fell in the UK after strong lockdown-linked sales in the first part of the previous year. Online sales were down 5.4% as shoppers returned to stores as the pandemic eased. However, Tesco said its Whoosh fast-track grocery service was proving popular and now operated from 1,000 stores, 200 more than previously planned.

Sales in convenience stores and large supermarkets rose, with small shops in central London seeing the fastest growth – at 9.4% – reflecting the return to office-working in the capital.

Profits were hit by a £982m write-down on the value of properties and the £138m cost of restructuring, which included hundreds of job cuts when the retailer shut down its fresh food counters in stores.

Ken Murphy, the chief executive of Tesco, which owns the Booker grocery wholesaler and runs stores in eastern Europe and Ireland as well as the UK, said:

“It’s been an incredibly tough year for many of our customers, and we have been determined to do everything we can to help.

More here.

Over in Paris, shares in LVMH, the world’s largest luxury company, have hit a record hihh after it smashed analysts’ expectations thanks to a rebound in demand in China.

Last night LVMH, which owns the Louis Vuitton and Dior fashion houses, as well as Hennessy cognac and U.S. jeweler Tiffany, reported a 17% rise in sales to €21.04bn for the first three months of this year.

Demand in China rebounded sharply after COVID-19 lockdowns.

LVMH said it had enjoyed “an excellent start to the year”, within an “uncertain” geopolitical and economic environment.

It said:

Europe and Japan, which enjoyed strong growth momentum, benefited from robust demand from local customers and international travelers; the United States, a market which continues to grow, had a steady performance.

Asia experienced a significant rebound following the lifting of health restrictions.

LVMH’s shares have jumped almost 5% this morning, while other luxury goods makers such as Burberry (+2%) are getting a lift too.

LVMH’s strong performance is an early snapshot of the scale of the Chinese recovery since president Xi JinPing ended the country’s lockdowns.

Peter Garnry, head of equity strategy at Saxo, says:

The European luxury retailer reported a strong surge in Q1 sales, led by fashion and leather goods rising 18%, nearly twice the pace of growth expected from analysts.

The company reported strong growth in sales in Asia after China lifted Covid restrictions.