Lloyds Banking Group (LSE: LLOY) was starting to disappoint investors again, falling back below 42p just a few weeks ago. But since since a recent low in early September, the Lloyds share price has now gained 12%. We’re still only looking at a price of around 46.5p and a two-year fall of 10%, so not a screaming success yet.
But it’s good to see some upwards movement, especially at a time when the FTSE 100 has essentially just been going sideways. I remain convinced that Lloyds shares are undervalued, but what we might need is a bit of economic cheer. And we were handed a modest snippet of just that on Thursday.
According to the Office for National Statistics, the UK economy grew by 5.5% in the April to June quarter. That’s better than expected, against a previous estimate of 4.8%. It’s good, but I’m more impressed by a different figure. It seems that the UK’s GDP level is now just 3.3% lower than it was in the final quarter of 2019, prior to the pandemic.
All those early fears of economic devastation, perhaps even something to rival the Great Depression… Well, it sounds like we’re really only going to see a modest wrinkle in the long-term statistics.
Anyway, what does this mean for the Lloyds share price? It’s no good just pointing to a low P/E and saying “That’s so cheap, the price just has to rise.” No, I’ve been trying that for years.
It’s the economy
In more general terms, a better economy means a better outlook for banks like Lloyds. The banks are possibly the perfect example of a so-called ‘picks and shovels’ investment. No matter who finds the gold, those providing the tools and services should do well.
There are plenty of examples of such companies in the services sector. But finance is the ultimate service that every company needs. So when the economy is doing well, banks can prosper. And when it isn’t, they suffer. So the fact that we’re not so far behind the pre-pandemic days after all is good news for a bank like Lloyds with such a heavy focus on the UK. That we’re recovering quicker than expected is good news too.
Lloyds share price boost?
Then we have interest rates. The super-low rates we’ve had for years are bad news for Lloyds. It makes money by lending, and their margins are squeezed hard when base rates are stuck at 0.1%. But economic growth means inflationary pressures, with forecasts suggesting inflation will exceed 4% by the end of the year.
And you know what high inflation means? Yep, interest rate rises. So far the Bank of England has kept things on hold. But if we see rates rising over the coming year, I’d expect to see the Lloyds share price getting a bit of a lift.
That said, the economy is still very much uncertain. And a good few investors aren’t keen on Lloyds’ venture with Barratt Developments in the build-to-rent market. It’s just not what banks do really, is it? So I reckon we’ll still see pressure on Lloyds while housing market pessimism persists.
But on balance, I think any economic good news is good for Lloyds. I’m still holding, and the idea of a top-up is becoming more attractive.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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