The FTSE 100’s biggest banks, Lloyds Banking Group PLC (LON:LLOY), Barclays PLC (LON:BARC), NatWest Group PLC (LON:NWG) and HSBC Holdings PLC (LON:HSBA) have suffered blows to their share prices on Wednesday afternoon following a gloomy set of economic forecasts for the UK that emerged in the Chancellor of the Exchequers spending review statement at lunchtime.
The forecasts from the Office for Budget Responsibility (OBR) unveiled by Rishi Sunak are predicting that the UK economy will contract by 11.3% in 2020, the biggest yearly fall in over three centuries, while unemployment is expected to reach a peak of 7.5% in the second quarter of next, equivalent to about 2.6mln jobless Britons.
The prospect of an unemployment surge spells bad news for many UK lenders due to the risks of increased levels of bad debts as borrowers find themselves unable to maker loan and mortgage repayments after losing their jobs.
Meanwhile, OBR estimates that the government’s borrowing will hit GBP394bn this year, the highest ever level for peacetime.
Higher debt tends to be accompanied by lower bond yields, while there also remains a risk that the Bank of England may decide to introduce negative interest rates, another bad sign for bank deposits as customers are likely to withdraw their cash from accounts if there is a chance they will be charged to keep them there.
This combination of factors sent Lloyds shares down 3.7% to 38p in late-afternoon trading, while Barclays fell 5.4% to 142p, NatWest dropped 3% to 161p and HSBC dipped 0.9% to 396p.
Scrapping of RPI reform angers statisticians
Another move, which was published alongside the spending review, was the government’s decision to scrap plans to replace the retail price index (RPI) inflation measure with the alternative Consumer Prices Index (CPI), with the Chancellor now saying the change will not occur until 2030 in order to protect the holders of UK gilts linked to the index.
The delay has attracted the ire of the UK Statistics Authority (UKSA), with chair Sir David Norgrove saying the government and others should “cease to use the RPI, a measure of inflation which the Government itself recognises is not fit for purpose”.
The RPI measure has been criticised by many statisticians as not being fit for purpose, with RPI-linked increases in rail fares a yearly source of annoyance among most commuters. However, others have warned that scrapping could cause heavy damage to people’s investments and pensions.