Overview
This publication summarises intelligence gathered by the Bank's Agents between early July and late August. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same three months a year ago.
Economic activity remained subdued, and there were growing concerns about the outlook – most notably from contacts in consumer-facing businesses, but also from the business services sector.
Employment intentions had softened and pointed to broadly stable employment levels over the coming year. Recruitment difficulties had eased further. Pay settlements were expected to come down gradually over the rest of the year and further in 2024.
Easing cost pressures were feeding through to lower consumer price inflation. Contacts expected price inflation to fall for many goods (including food, cars, clothing, and furniture) and also for some services, such as leisure and hospitality.
Consumer spending
Despite temporary weather-related softness in July, nominal growth in consumer spending on goods and services remained quite strong. Spending growth was almost wholly driven by inflation, however, as volume growth was still weak.
Wet weather dampened demand, especially for seasonal merchandise, at supermarkets in July. Drier weather had supported sales volumes since then, but contacts noted increased consumer caution. Reflecting such caution, food retailers reported falling demand for premium items.
Demand for clothing and footwear was supported by discounting, including deeper back-to-school offers than usual.
Lower levels of activity in the housing market continued to weigh on sales of goods such as furniture, household appliances, and carpets. The wet weather further reduced sales of garden furniture.
Hotels and other accommodation providers said that demand from UK tourists was lower than last summer because of cost of living pressures and the increased availability of foreign travel. Contacts were concerned about lower bookings for autumn and winter, but they noted that greater customer caution meant that bookings were being made later than usual.
Demand was still reasonably strong at visitor attractions, boosted by higher numbers of foreign tourists, but spending on secondary items, such as gifts, food and drink, and souvenirs, was weaker than last year.
Pubs and restaurants were hit by wet weather in July, but customer numbers picked up as the weather dried in August. Spending per customer was lower than last year, as customers traded down to less expensive menu options.
Air passenger numbers continued to recover, with some airports getting close to or above pre-pandemic norms over the summer.
Contacts were increasingly pessimistic about the effect of higher mortgage payments and wider cost of living pressures on consumer spending over the coming year.
Business services
Fee increases remained the main driver of steady growth in business services revenues. It was becoming more difficult to increase fees and some contacts reported a reduction in their order pipeline.
Business services volumes remained slightly below the level of a year ago, but fee increases supported steady revenue growth.
Strong nominal revenue growth continued in the IT, insurance, law, and audit sectors.
Activity picked up towards more normal levels at insolvency and restructuring businesses, which contacts in part attributed to tighter credit conditions and less forbearance from HM Revenue and Customs.
Demand for corporate event and travel services continued to recover but remained below pre-pandemic levels.
Businesses in the wholesale, logistics, and warehousing sectors continued to see reductions in volume, as demand returned to normal levels after booming during the pandemic.
The fall in construction activity further reduced demand for construction-related services.
Demand for recruitment services had reduced in recent months, in line with the reduction in businesses’ employment intentions.
The outlook for growth in business services continued to weaken. More contacts reported that the pipeline of activity was lower than in the first half of this year, which was making it more difficult for them to increase fees. Higher funding costs meant many businesses were becoming less willing to spend on services.
Manufacturing
Manufacturing volumes remained broadly stable. The weakness of domestic consumer and construction demand contrasted with the strength of exports.
Export-focused manufacturers reported higher output, especially in the defence, pharmaceutical, and energy sectors. Contacts said the outlook for output was also positive, based on substantial order books.
UK automotive production continued to recover robustly. The improved availability of micro-processors allowed output to increase. There were large backlogs of orders to work through, but contacts said production could decline at some factories when they are retooled for electric vehicles next year.
Demand for construction products was much weaker, driven by marked falls in housebuilding and home improvement activity.
Domestic consumer demand remained notably weak for home appliances, furniture, and other consumer durables. Contacts expected output growth for consumer-focused manufacturers to remain negative into next year.
Food and drink volumes were broadly stable. Consumers continued to trade down to less expensive items.
Construction
Construction volumes fell further as demand weakened, costs remained elevated, and the availability of funding reduced.
Housebuilders reduced openings of new sites and slowed building on existing sites as house sales slowed. Home improvement activity remained subdued.
Many commercial real estate projects, such as warehousing and data centres, continued. But work on a growing number of projects had been slowed, and new projects were increasingly being postponed.
There was still a lot of office refurbishment going on to increase energy efficiency and attract staff back to office working.
Much public infrastructure work continued, but the recently announced delays to HS2 had raised concerns. Some local road and rail infrastructure projects had also been halted or delayed.
Contacts said planning delays were still limiting potential growth across the construction sector.
Contacts expected further falls in construction activity for at least the coming six months, as demand weakened and projects were delayed or cancelled. Although costs were stabilising, they were expected to remain elevated. Funding had become more expensive and, as asset valuations were reduced, less widely available. The failure of some construction businesses would likely hamper projects and could also increase costs.
Investment
Investment intentions remained subdued in general, although they varied across contacts.
Many contacts reported that pressure on cash flow and margins was increasingly deterring them from investment.
But some contacts, who either did not have to borrow or were not facing cash-flow challenges, reported more robust investment intentions.
Some reductions in investment reflected the completion of catch-up spending following pauses during the pandemic, rather than pressure on cash flow or margins.
Recruitment difficulties were cited less often as a driver of investment in recent months than they were last year and the first half of this year.
The transition to a lower carbon economy continued to stimulate investment across all sectors. But many contacts said that uncertainty about the availability of support for transition was making them more cautious.
Contacts in the business services sector said they were largely planning normal levels of investment, although some were making cuts to protect profitability. IT and digital investment remained central to investment plans, although many businesses had now completed planned changes to IT infrastructure made to facilitate flexible working.
Investment in the construction sector was still being held back by planning delays, higher building costs and finance costs, in addition to the further weakening of demand.
Corporate credit conditions
Credit supply remained tight for businesses in all sectors, and lenders were scrutinising affordability more conservatively. Credit demand was still weak, with some businesses making early repayments because of concerns about the higher cost of credit.
Lenders remained cautious and concerned about the ability of businesses to repay borrowing, even in sectors where demand was relatively strong. They continued to favour lending to larger, well-established businesses, while small businesses reported that it was difficult to raise finance. In general, banks were applying more cautious affordability tests to loan applications – for example, by tightening loan to value restrictions or by testing affordability against higher interest rates.
Lenders were also increasingly preferring to lend to businesses in strong financial positions. Some large firms were reported to be tightening trade credit terms with their clients and their supply chains. Overall, contacts felt that credit conditions remained tighter than normal.
Credit demand remained weak across all sizes of business, reflecting the higher cost of borrowing and a more negative economic outlook. Businesses were generally reluctant to take out new loans, and many were looking to make early repayments to reduce their exposure to higher interest rates.
Levels of bad debts were rising, but from a low base. Contacts expected insolvencies to rise further over the coming year. Business failures were expected to stem from cash-flow issues and rising debt costs, especially in the retail, construction, and hospitality sectors.
Employment and pay
Employment intentions had reduced over the past couple of months. Recruitment conditions had eased significantly since the start of the year. Pay settlements were expected to ease gradually over the rest of this year and further in 2024.
Businesses generally expected to keep staff numbers broadly stable over the coming year. Intentions to cut staff numbers were most notable in the real estate and construction sectors.
Recruitment difficulties continued to ease. The easing was still concentrated at the lower end of the skills range, but there were signs that it was becoming more general. Some contacts said that retention had improved as staff seemed more reluctant to leave jobs because they were worried about being ‘last in, first out’.
Recruitment remained very difficult for businesses in sectors with persistent skill shortages, such as IT, engineering, and finance.
Pay settlements for 2023 were running at around 6%–6.5%, on average. Most contacts expected the level of settlements to reduce over the rest of this year and then reduce further next year. Expectations of lower settlements reflected contacts’ expectations of further falls in inflation, reduced demand for businesses’ goods and services, and further easing in recruitment difficulties.
Far fewer businesses expected to make ‘cost of living’ payments to staff over the coming year than had done so last year.
Many contacts, especially in the consumer services sector, remained concerned about the possible impact of National Living Wage increases next year.
Costs and prices
Lower input cost inflation was reducing output price inflation, especially for consumer goods.
Manufacturers’ cost inflation continued to moderate as global demand conditions weakened and sterling remained relatively strong. Some businesses that signed short-term energy contracts in the past 12–18 months were getting lower prices when the contracts came up for renewal. Imported manufactured-goods inflation was expected to ease further, aided by lower freight costs. Most contacts in the manufacturing sector expected to return to making one price increase in 2024, having made multiple increases in 2022 and 2023.
Price inflation remained high in the business services sector, but contacts thought it had peaked. There was growing caution about increasing prices further on the part of businesses (eg accounting, legal, and IT services) that had previously passed high pay inflation through to higher output prices.
Food inflation remained elevated but was falling. Some food producers expected to hold prices close to current levels as they were more certain about their future input costs.
Contacts reported that used car price inflation had returned to more normal rates. They expected lower new car price inflation over the coming year, because cost pressures were easing and households were facing higher finance costs.
There had been more discounting of summer clothing than last year, because of the wet weather in early summer. For autumn and winter 2023, low single-digit inflation was expected in clothing.
For other major goods, such as household appliances and furniture, contacts expected prices to remain broadly stable for the next year in the face of continued weak demand.
Pay inflation was still high for businesses in the consumer-services sector, but their other cost pressures were easing. There were signs that this easing was slowly feeding through to lower output price inflation expectations, especially in areas where demand was weakening, such as leisure and hospitality.
Profit margins were still squeezed, as many businesses had been unable to fully pass higher costs through to output prices. And businesses were generally pessimistic about the prospects for margin rebuilding over the coming year, because demand for most goods and services was weakening.
Property markets
Housing market activity weakened further, but rental demand remained strong. Activity in the commercial property market continued to be weak.
Housing market
Contacts reported that higher mortgage rates had been the main factor in a further weakening of housing market activity. Demand was lower than supply for the first time in a few years and seen as unlikely to pick up until mortgage rates stopped rising.
Housebuilders said they were continuing to scale back their construction plans because of the weakening of activity and higher costs. Builders were making more use of discounts and other incentives to support house sales. They were also increasingly selling to housing associations and build-to-rent investors, rather than to individual buyers.
In the rental market, contacts said that demand had remained strong. Supply was lower than it was a year ago, as tighter regulation and higher mortgage rates had caused some smaller buy-to-let landlords to leave the market.
The strength of rental demand, relative to supply, meant that higher mortgage rates were generally being passed through to rents. There was little sign of a marked increase in rent arrears, although some contacts were worried that arrears could worsen later in the year.
Commercial real estate
Tenants and investors had a strong preference for higher-quality new or refurbished offices, in part to encourage staff to work from the office more often. Contacts reported further repurposing of office space for residential use.
Demand for industrial property, such as warehouses, continued to fall from the highs of recent years, although it remained above pre-pandemic levels. Strong environmental credentials were of growing importance to tenants.
Demand for retail property was still generally weak, although retail parks and shopping centres were doing better than high-street properties.
Banks were more cautious about new lending for commercial development or purchase. Developers’ caution about new borrowing had increased, too. And there were concerns around some borrowers’ ability to renew loans secured against commercial property.
Outreach engagement
Concerns over essential household spending were elevated among members of the public. Charities continued to see a fall in volunteering numbers and raised concerns over an increase in doorstep lending.
Members of the public said that pressures on household budgets had intensified. Food, housing, and childcare costs dominated concerns. They reported widespread cuts in social and other discretionary spending. Some had taken up second jobs or casual work to manage increased costs. People on lower incomes appeared to be disproportionately affected. Long-term impacts of the cost of living crisis on both inequality and mental health were emerging as concerns.
Charities reported that volunteering rates had continued to decline since the pandemic and that a change in people’s circumstances was driving this. Charities had also seen many senior leaders resign due to increased pressures associated with working in the sector.
Several foodbanks said they were spending reserves to meet shortfalls in food donations this year. Some charities who employ people with disabilities were struggling due to the higher operating costs associated with having more vulnerable employees.
Many financial advice charities reported an increase in doorstep borrowing by low-income households who would not typically qualify for loans from regulated institutions.
