LLOYDS Banking Group flagged early signs that customers are tightening their belts in the face of the cost-of-living crisis as it cut its outlook for the UK economy and posted lower profits.

The lending giant said it has seen 1.2 million subscriptions contracts cancelled over the past six months, with customers spending more on energy and food as inflation soars.

It booked an impairment charge of £177m as it warned that the cost-of-living crisis could affect borrower disposable income, while it also downgraded its growth forecasts for the UK economy as the Ukraine war compounds inflation pressures.

The group posted a 14% drop in pre-tax profits of £1.6 billion for the first three months of 2022, down from £1.9bn a year earlier, though the fall was not as bad as feared as costs rose less than expected.

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Chief executive Charlie Nunn said: “Whilst we are seeing continued recovery from the coronavirus pandemic, the outlook for the UK economy remains uncertain, particularly with regards to the persistency and impact of higher inflation.

“We are proactively contacting customers where we feel they may need assistance and will continue to help with financial health checks and other means of support.

“We encourage customers, where affected, to get advice early and talk to us.”

The group said its customer data showed cutbacks on discretionary spending, with cancelled subscriptions including for streaming services and gym memberships, though it said this may also reflect lifestyle changes amid the pandemic.

Lloyds chief financial officer William Chalmers said that, while borrowers’ arrears remain low and below levels seen before the pandemic, the bank is braced for these to rise.

“We’re likely to enter into a tougher environment and expect impairments to tick up a little bit,” he said.

The bank now expects the UK economy to grow by a lower than first forecast 3.6% in 2022, with expansion flatlining in the second quarter, but it said this will be offset by stable house prices and modest unemployment.

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The group sees interest rates rising to 1% in the second quarter and increasing again to 1.25% in the following three months as the Bank of England battles to rein in rocketing inflation.

Lloyds saw costs rise to a lower-than-forecast £2.15bn in the first three months from £2.11bn a year earlier and upgraded its full-year outlook for key profit measures, including its net interest margin, thanks to higher UK interest rates.

Shares in the group rose 2% yesterday morning thanks to the better-than-expected first-quarter performance.