It’s clear to anyone with even the smallest finger on the pulse of current events that a catastrophe is coming down the tracks for the UK economy following the Covid-19 breakout. For cyclical stocks that are dependent on these shores for the bulk of, or even all of, their profits, things are about to get very bumpy. It’s time to cut Lloyds Banking Group (LSE: LLOY) adrift, I feel.
A chilling outlook for 2020 has got even worse this morning with the release of fresh purchasing managers index (PMI) numbers. Experts had naturally been predicting a bad result from both the manufacturing and services sectors. The state of the figures, though, are enough to make even the most optimistic analysts wince.
Manufacturing PMI for April slumped to 32.9 from 47.8 last month, much worse than an anticipated 42. But things are even worse for the services sector, an area responsible for two-thirds of British GDP. This plummeted to 12.3 from 34.5 in March, the worst fall since records began in the mid-1990s. A contraction of 28.5 had been touted beforehand.
Worst economic shock for centuries?
It seems, then, that a lot of pain is coming the way of Lloyds and its banking rivals. These firms have been suffering in recent years as low interest rates have crimped profits, and bad loans have risen and revenues shrunk as Brexit uncertainty has persisted.
But it looks as if these problems could prove small potatoes compared with what Lloyds et al face at the start of this new decade. Today’s data has already sparked some alarming words from a key Bank of England policymaker. Monetary Policy Committee member Gertjan Vlieghe said: “Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.”
Is Lloyds in danger?
Vlieghe is not the only prominent economist wringing his hands at this new data. Howard Archer of EY Club now estimates that the UK economy will shrink 6.8% over the whole of 2020.
To put this into context, British GDP declined by just 4.2% at the height of the 2008/09 banking crisis. And this was a period when, of course, Lloyds required a government bailout to avoid going to the wall.
The upcoming strain on the banks was highlighted by a Reuters study this week. Using data from Refinitiv, it said that analysts “have revised upward by almost 130% their expectations for loan loss provisions in 2020 by Europe’s most important banks” during the past month.
The lights aren’t flashing red right now. But remember that Lloyds cancelled a share buyback over the autumn due to its weakening balance sheet. The last thing it needs now are more mighty bad loan provisions.
I’m sure I’m not the only one fearing what Lloyds’ first-quarter financials next week will reveal. If I were one of the bank’s shareholders I’d suck up the 53% share price drop in the year to date and sell out right away.
