Overview
This publication summarises intelligence gathered by the Bank’s Agents between mid-April and early June. The Agents’ scores published alongside this document are based on information gathered between mid-April and late May, and they generally represent activity over the past three months compared with a year ago.
During the early stages of the pandemic in 2020, economic activity fell at an unprecedented pace, reflected in some Agents’ scores moving to the low extremes of their range, where scores can be consistent with a wide range of quantitative outcomes.
More recently, economic activity has recovered as social distancing restrictions have been lifted. Because most of the Agents’ scores compare the past three months with a year ago – when restrictions meant activity was at very low levels – this has resulted in a sharp rebound in some of the scores to the upper extremes of their range.
Consumer demand
There was strong growth in spending on consumer goods and services as social distancing restrictions were lifted around the UK.
Contacts reported a boost to retail sales following the reopening of non-essential stores around the UK. Spending on household goods and DIY products continued to be higher than a year ago, supported by strong housing market and home-improvement activity. Spending on clothing also rose. And car dealerships reported increased demand – in particular for servicing and parts.
However, transportation delays had resulted in shortages of some items, such as furniture, car parts and electrical goods. Some contacts reported ongoing issues transporting food from Great Britain to Northern Ireland, though there were a few reports of supply chains being adjusted to source more goods locally.
Sales growth at supermarkets and convenience stores weakened, according to contacts. This mainly reflected unfavourable comparisons with a year ago when sales had been supported by restrictions on social forms of consumption. But there was also some evidence of spending being diverted away from groceries towards eating out as the hospitality sector began to reopen.
In general, contacts expected growth in retail sales to normalise over the coming months, and some saw potential downside risks to consumption when the Coronavirus Job Retention Scheme (CJRS) ends later this year.
Spending on consumer services recovered strongly as social distancing restrictions were eased, though remained below pre-Covid-19 (Covid) levels in aggregate. Contacts in the hospitality and leisure sectors reported robust demand as restrictions were eased, though activity was constrained to some extent by social distancing measures and the poor weather in May.
Personal care businesses such as beauty and hairdressing salons reported increasing opening hours in order to meet pent-up demand. In the tourism sector, contacts said domestic bookings were above pre-Covid levels, but demand from overseas tourism remained weak due to travel restrictions.
Business and financial services
Business services activity continued to grow strongly as social distancing restrictions eased and confidence improved, but exports of services remained subdued.
Accountancy, legal and consultancy firms continued to report good levels of demand, mainly for work relating to taxation and mergers and acquisitions (M&A). Some contacts expected M&A activity to pick up further in the coming months, owing to large cash buffers held by many companies. Contacts in asset and financial management said that revenue growth was supported by increasing investor confidence.
In IT services, revenues were driven up by continued demand for digitisation, remote working and cyber security, as well as the resumption of projects postponed during the pandemic.
Contacts reported an increase in corporate recruitment, though new tax rules for contractors were reported to be reducing demand for temporary and contract staff. Activity in facilities management also increased.
Activity among delivery firms remained higher than pre-pandemic levels, but is expected to moderate over the coming months as non-essential retailers reopen and social distancing restrictions ease.
For some sectors, activity remained below pre-Covid levels, although it began to pick up as restrictions were loosened. Revenues improved slightly for more discretionary services, such as marketing and advertising. And there were some signs of a tentative pickup in activity in corporate hospitality, events and business travel, though this was from a very low base and demand continued to be well below pre-pandemic levels.
Services exports remained subdued due to a combination of Covid-related travel restrictions, Brexit-related disruption to logistics services, and from some companies setting up operations in the European Union (EU) in order to continue to serve clients there.
Manufacturing
Manufacturing output increased to close to pre-Covid levels, though supply bottlenecks constrained production in several sectors.
Output among food and beverage producers increased as the hospitality sector stocked up ahead of reopening. Strong demand for construction materials pushed mining and quarrying output above year-ago levels, and contacts in the oil and gas sector said that production was close to pre-pandemic levels.
There were widespread concerns among contacts about the cost and availability of materials and components. Output in the automotive sector continued to be constrained by the shortage of semiconductors. And contacts in some sectors reported stockpiling of materials and components in anticipation of continued supply-chain disruption. There were many reports of lead times increasing.
Contacts reported that Brexit-related issues that had previously impacted on exports – such as customs declarations, rules of origin and product-labelling – were starting to abate as businesses adapted to the new requirements. Demand from the EU for UK goods was reported to have returned. More businesses said they were setting up hubs in the EU in order to continue selling to customers in the region. There was limited evidence of substitution away from EU imports.
Construction
Construction output picked up sharply from earlier in the year, driven by housebuilding and public infrastructure projects, but there were some concerns that materials shortages could limit output.
Construction of new homes continued to be strong, with demand supported by the extension of the transaction tax holiday in some parts of the UK and the growing availability of high loan to value mortgages. Home improvement and repair and maintenance activity also supported output.
Public infrastructure projects continued to support construction output – in particular school and transport developments – and contacts reported a good pipeline of publicly funded work. Looking ahead, contacts also expected green energy projects to support growth.
By contrast, private commercial work remained substantially weaker than a year ago, in particular for retail, hospitality, higher education and office developments. However, construction of logistics, warehousing and technology premises remained strong.
Contacts reported severe materials shortages, including for cement and timber, and there were some concerns about shortages limiting output. Labour shortages were also an issue for some contacts.
Corporate financing conditions
Demand for new credit was subdued; there were signs of credit availability improving modestly, though it remained tight for sectors most affected by the pandemic.
Demand for new borrowing among small companies was reported to have been subdued, reflecting a pickup in economic activity and associated higher cash flows for many in recent months, plus widespread borrowing under government-guaranteed lending schemes in previous quarters. Medium and large corporates reported strong investor appetite for issuance in debt and equity markets. As a result, demand for bank credit from large corporates remained subdued. There were reports of limited demand for the Government’s new Recovery Loan Scheme (RLS).
The conditions associated with the RLS, which came into effect in April, were tighter than those for previous government schemes. However, some of the major banks were resuming lending to new customers, having focused on existing customers during the pandemic, which would improve credit supply for some small companies in particular. And some specialist non-bank lenders were reported to have re-entered the market for lending to small and medium-sized enterprises, for example in property development, buy-to-let and in venture capital.
Medium-sized companies in stable or growing sectors said that bank credit was readily available. However, contacts in sectors that had been most affected by the pandemic, such as retail, construction, travel and office real estate, reported some tightening in credit availability.
Trade credit payment terms remained similar to pre-pandemic levels and arrears continued to be low. However, some contacts expressed concern about trade credit insurance cover being withdrawn when the Government’s support scheme finishes at the end of June.
Concerns about corporate failures later in the year were abating due to the pickup in activity following the easing of social distancing restrictions, and increased confidence in the economic outlook. However, risks remained for some sectors such as those in foreign travel, and businesses based in office districts.
Property markets
Demand for housing remained strong and outweighed supply; investor demand for commercial property was mixed.
Housing market
Agency contacts reported ongoing strong demand for housing across most of the UK and a shortage of properties for sale, which pushed up prices. In central London, by contrast, house price growth was more muted due to a lack of overseas buyers and weak demand for apartments with no outdoor space.
Demand for rental property also remained strong in most parts of the UK, except central London. Housing associations reported low levels of rent arrears, though there was some concern that arrears could pick up once the temporary increase in Universal Credit and the CJRS finish later this year.
Commercial property
Investor appetite for commercial property was reported to have improved to just below pre-pandemic levels, but with demand centred on prime office and industrial properties, and shifting away from retail and non-prime office premises. Demand from overseas investors was reported to be strong.
Tenant demand for newer office premises was robust – particularly for buildings with good environmental, social and governance ratings. By contrast, demand for older properties was weaker, in part due to the substantial costs of refurbishment and retrofitting to meet environmental standards. Many contacts expected to reduce their office footprint in the coming years, posing some downside risks to future rents and valuations of office buildings, though tenancy changes can generally only take place when leases expire.
Tenant and investor demand for industrial, logistic and science-related properties remained above pre-pandemic levels and rents continued to increase.
By contrast, falling demand for high-street retail premises and shopping centres led to declining values, and rent arrears continued to build. Contacts said restructuring deals were widespread, mainly among casual dining businesses and retail chains. Shopping centre contacts said premises may need to be repurposed due to increasing vacancy rates.
Investment
Companies’ investment intentions continued to improve, as firms catch up on investment plans paused during the pandemic.
The rise in investment intentions recently followed sharp falls in 2020 and therefore partly reflected companies catching up on investment or reinstating projects that had been paused.
Overall, contacts expected investment to increase over the coming year, though plans were conditional on demand and revenues recovering. And there were varied responses to the Government’s capital allowance super deduction, which some contacts said had encouraged them to confirm existing – or bring forward – investment plans, while for others it had not changed or incentivised investment plans.
In manufacturing, around half of contacts expected to increase investment compared with the previous year, mostly to upgrade machinery, expand capacity or spend on research and development.
Business services companies reported investing in IT and digitalisation to improve efficiency, develop e-commerce and facilitate remote working. Logistics companies said they were continuing to invest in vehicles, port facilities, and warehousing and storage.
In consumer services, investment varied according to exposure to public health restrictions. For example, airlines remained cautious about investment. In retail, some contacts reported repurposing or upgrading facilities – for example, by incorporating more leisure offerings to attract customers. Contacts commonly reported investing in online sales platforms.
Employment and pay
Employment intentions turned positive as the economy continued to recover, and some sectors reported recruitment difficulties and labour shortages. Pay growth was subdued, but there were some reports of upward pressure for staff with key skills.
Contacts reported that headcount was stabilising, and a growing minority of businesses expected to increase staff numbers, either to meet strengthening demand, because they had paused hiring during the pandemic, or because they had reduced headcount by too much during the pandemic.
Concerns about the need for large-scale redundancies in hospitality and leisure abated, reflecting increased confidence about the outlook as social distancing restrictions were lifted, though contacts still expected job losses in some sectors, such as travel, aviation and retail.
Although a number of the Agents’ contacts continued to report that recruitment was easier than normal, an increasing proportion reported having difficulty recruiting staff – such as in hospitality, freight and logistics, IT, engineering, construction, professional services, nursing, agriculture and food production.
Some labour shortages were structural and had existed prior to the outbreak of the pandemic, for example in engineering and technology. But some contacts also attributed hiring difficulties to a variety of Covid-related factors, such as the large number of reopening businesses trying to hire staff at the same time; nervousness among candidates about changing jobs, including due to concerns about future eligibility for the CJRS; or staff being unable to return to the UK from overseas.
A number of contacts reported a general shortage of non-UK workers – particularly for low-skilled jobs – which could be related to EU withdrawal or Covid restrictions.
Nonetheless, pay growth remained modest overall, with settlements continuing to be in the 1.5%–2.5% range. But there were some reports of higher pay awards, for example for skilled workers or as compensation for pay freezes in 2020.
Capacity utilisation
Capacity utilisation increased as economic activity recovered, although it varied by sector; supply shortages were reported to be becoming a constraint for some manufacturing and construction firms.
Contacts in retail and hospitality reported increased capacity utilisation following the easing of restrictions, reflecting higher demand and reduced physical capacity due to ongoing social distancing requirements. Some hospitality contacts reported a lack of staff, affecting customer service levels and constraining opening hours.
By contrast, contacts reliant on business travel reported a substantial degree of spare capacity, with occupancy rates well below normal.
Capacity utilisation in business services was close to normal, or above normal for businesses that were affected by skills shortages. Remote working resulted in a significant degree of spare capacity in companies’ physical space and some contacts said they planned to reconfigure premises or reduce their office space when leases come up for renewal.
In manufacturing, capacity utilisation had increased as demand strengthened. A number of contacts said that shortages of materials and components were increasingly becoming an issue, for example by stretching lead times. Construction contacts also said that shortages of materials and labour were constraining output growth.
Costs and prices
Input cost inflation continued to rise and spread through supply chains. Consumer prices increased modestly where demand was strong, but inflation remained low where demand is yet to recover.
Contacts reported large cost increases for a wide range of inputs, such as agricultural products, construction materials, metals, fuels, petrochemicals, timber and paper. This was mostly attributed to global factors, such as a strong recovery in demand and supply-chain disruptions caused by plant shutdowns and adverse weather.
Freight and shipping costs also remained elevated, in particular for goods imported by container from Asia. Contacts said that Brexit-related costs, for example for administration and duties were stabilising, but had yet to be fully factored into companies’ pricing models.
Although the outlook was uncertain, most contacts expected input costs to remain high over the coming months, but costs were generally not expected to stay as high as they are now in the medium term.
Companies reported more of these higher costs being passed through into intermediate prices, especially in manufacturing, where there were some reports of cost escalators for particular materials. However, contacts said they had been less able to raise prices for goods sold to the major supermarket chains.
In construction, there were also increasing reports of costs feeding through to prices, though mainly for housebuilding and home improvement and maintenance work – where demand is high. Contacts in other parts of construction found it more difficult to pass through additional costs because work is usually awarded by tender, with little scope to increase prices at a later stage.
However, companies said that the extent of pass-through of increased costs to consumer prices has been limited so far. In consumer goods, there has been some pass-through where demand is high, for example for technology and goods for the home and garden. But food prices were lower than a year ago, reflecting base effects from a period when there was little promotional activity.
Consumer goods inflation may rise further over the coming months, especially in some sectors. Some retailers said they have done less discounting than last year, either because stock levels are lower or because recent closures have reduced competition. Car dealers expect new car prices to rise as supply becomes constrained. Food retailers generally expected price inflation to be modestly positive in the second half of the year.
In consumer services, the degree of price inflation varied between sectors. Contacts in sectors experiencing strong demand, such as personal care, some household trades, telecommunications and domestic tourism, reported price increases of 3%–5%. But prices have been unchanged or fallen in sectors where demand has not recovered, for example for some city centre hotels, or where competition is strong.
