Think the banking crisis is over? Then you should take a look at the big banks’ recent results. Flick through the numbers for Lloyds and a few things leap out.
The first is that 40% of Lloyds’ outstanding residential loans have loan-to-value (LTV) ratios of 80% or over. That’s frightening, given that the average LTV on their “impaired loans” is only 76.5%, and given that 13% of all their loans are in negative equity.
It’s pretty clear that UK house prices will soon see another fall. As Ian Campbell points out on Breakingviews, prices have to fall another 17% just for the long-term ratio of price to average earnings to approach historically normal levels. That would put a lot more than 13% of Lloyds’ loans in negative equity, which often leads to impairment.
The second is also about housing. It shows that the average LTV on the bank’s new home loans is 59.3%. This is serious. This tells us that lending is very tight right now (most would-be borrowers looking for a mortgage at Lloyds won’t have a 40% deposit) and, in part, these numbers tell us why. Lloyds has lots of bad loans. Assuming it has done even the most basic of risk assessments, it must know it will soon have many more.
This is deflationary stuff and goes some way to explaining why inflation in Britain is as low as it is right now.
There has been some handwringing about the fact that the consumer price index has hit 3.5% and that producer price inflation is over 4%. But look at this in context. The pound has fallen 28% so far (that’s more than in your usual sterling crisis). So, given how much we import, the surprise should be not that inflation is as high as 3%-4%, but that it’s as low as this. This is surely down to tight credit, falling real wages (no one except the odd delusional flight attendant seriously expects a pay rise this year), rising unemployment and the ongoing deleveraging of the UK consumer.
We’ve been told many times over in recent months that the falling pound will save us – partly by importing inflation and partly by making our exported goods cheaper. But this week’s numbers show just how untrue that is. We might be importing a degree of inflation but our weak currency isn’t doing our exports much good. Our trade deficit with the rest of the world leapt in January as export volumes wilted and manufacturing production, which was expected to show a slight rise, actually fell nearly 1%.
After many years of being ignored, it looks like our manufacturing sector is no longer big enough, or price-sensitive enough, to be helped by falling end prices. Gordon Brown is hoping for some good economic news before the election, if not before the budget. But it’s getting increasingly hard to see where it might come from.