Overview
This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee (MPC) at its March meeting. The intelligence was gathered in the six weeks to mid-February. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same three months a year ago.
Falling inflation and an up-tick in optimism – contingent on interest rates/financing costs following suit – are driving expectations of recovery among contacts. This is consistent with the MPC’s expectation of a gradual pickup in GDP growth over the next two or three years, as set out in the February Monetary Policy Report (MPR).
Retailers expect consumption in Q1 to remain weak, though they expect demand beyond then to improve for both goods and services. This is reflected in food, drink, and consumer goods producers’ anticipation of some recovery in demand from around the summer. Exporters expect growth in services exports to continue and for goods exports growth to turn positive later in 2024.
Investment intentions are slightly more positive than in recent months. Capital and intermediate goods producers expect some pickup in demand later in the year. An expected increase in business transactions should result in a modest increase in demand for discretionary business services. Although recovery in commercial real estate activity (and supporting services) and construction is expected to come later than most other areas, likely late 2024/early 2025; here, contacts expect sentiment and activity to turn only after monetary policy becomes less restrictive.
The period of relative weakness in demand we’ve seen is leading to a mild loosening in the labour market (though it is still tight by historical standards). Recruitment continues to get easier for most. Some businesses have started to move away from labour hoarding due to a loosening in the labour market. Expected pay settlements for 2024 remain broadly in line with those from the pay survey described in the February MPR.
Contacts report the same price dynamics as in recent rounds. Consumer price inflation continues to moderate, with services inflation moderating more slowly than for goods, reflecting the high labour content in services prices. Indications are that Red Sea disruption is having only a limited impact on retail prices so far.
Consumer spending
Even though Q1 is likely to be weak, rising real incomes, falling energy prices and expectations that monetary policy will loosen are contributing to cautious optimism among contacts that the volume of sales of goods and services will return to growth this year.
Supermarkets report growing volumes of sales. Consumers are seeking fewer bargains and seem a little more willing to treat themselves, suggesting confidence is improving. Shopping centres are seeing increased footfall, but this is not translating to increased volumes of sales, though volumes no longer appear to be worsening. Some contacts note greater use of buy-now/pay later credit by consumers. Demand for big-ticket items remains subdued, which is helping to limit the impact of Red Sea disruption on both availability and pricing.
Wet weather has been dampening demand at pubs and restaurants, especially in rural areas, adding to an already quieter than expected post-Christmas lull. Venues that cater to students, such as nightclubs, are doing poorly, reflecting their customers’ increased rents and cost of living.
Hotel occupancy is close to normal for this time of year. Wedding bookings are as strong as they were last year, but more customers are choosing cheaper mid-week dates. Theatres and entertainment venues report reasonably steady audience numbers, though sales of food and merchandise are weak.
Investment
Investment intentions for the year ahead are a little more positive than in recent rounds. Contacts seem more optimistic about the economic outlook owing to inflation falling and a sense that interest rates and the cost of funding will follow.
Transport and logistics contacts continue to increase investment in trucks, ships, warehouses, and infrastructure. Production contacts are expanding investment plans, focusing on automation, robotics, energy, and other efficiency measures to offset labour constraints and cost pressures. Business services investment is stabilising, reverting to more regular cycles of IT and office upgrade.
An increasing number of consumer-facing contacts are picking up refurbishment plans in both retail and consumer services, to appeal to customers and to be competitive. However, some are still holding back after difficult trading conditions in 2023. Few firms are increasing their number of outlets, with some consolidating.
Contacts continue to prefer to fund investment out of cash and are reluctant to take on borrowing. For those having to borrow, the higher cost of finance, along with higher material/input costs, pushes out payback periods and is leading to deferral of some capital expenditure.
Trade
The volume of exported goods continues to fall compared to this time last year. Contacts expect it to turn modestly positive later in 2024 as customers finish destocking and reduced costs make exporters more competitive.
Demand for UK goods from the EU and China continues to weaken. Demand from the US remains resilient. Weaker demand for consumer goods and previous overstocking by overseas customers continues to reduce exports in areas such as electronics. Passing on of stronger cost increases has made some UK goods exporters less competitive.
Services export values continue to grow mostly due to prices, with volumes growing only modestly. Contacts expect this to continue. Exports of professional services such as architecture and insurance continue to hold up. Inward tourism numbers, especially from the US, and spending continued to grow compared to this time last year.
Business and financial services
Business services revenue growth is picking up slightly on a year ago and contacts expect it to strengthen modestly during 2024. The price of business services continues to increase and volumes, until very recently a drag on revenue growth, have stopped falling compared to a year ago.
Corporate transactional activity, such as mergers and acquisitions and project financing, is increasing as confidence grows that interest rates have peaked. Contacts expect this to increase demand for business services over the rest of this year. Demand for insolvency and restructuring services is increasing along with the steady increase in insolvencies, which are now above pre-Covid levels. There were further reports of recovery from contacts in the corporate events, travel, and accommodation sectors. The corporate insurance sector remains buoyant as premiums increase, especially for marine insurance linked to issues in the Red Sea.
The story is not entirely positive across the business services sector. Continued constraints on discretionary spending means weak growth in advertising, marketing, and consultancy, while a slightly looser labour market means lower demand for recruitment consultants. Spending on IT services is also subdued though cyber and artificial intelligence remains strong. Provision of services to construction and commercial real estate such as plant hire, merchants, and architecture is flat at best. Demand for logistics and haulage is falling.
Manufacturing
Manufacturing output continues to fall slightly compared to a year ago as enquiries fail to become orders. But contacts are budgeting for a slow recovery during 2024.
Weak construction activity means subdued demand for building products, steel, timber, yellow goods, and chemicals. Production of durable consumer goods remains weak while food and drink output is flat overall.
Output growth remains strong in the aerospace and defence sectors supported by demand from the US and to a lesser extent Asia (excluding China). Growth in nuclear and renewables-driven production remains solid, as does that for oil and gas-related activities, though to a lesser extent.
Consistent with the expectations of retailers, producers of food, drink and consumer goods anticipate some recovery in demand this year. This optimism is shared by producers of capital and intermediate goods, though is rather more contingent on reductions in the cost of finance materialising.
Construction
Construction output volumes continue to fall. Contacts expect that activity will stabilise at weak levels during the summer. Most now anticipate sentiment to begin to improve in the latter part of the year, although as in other sectors this is contingent on reductions in Bank Rate.
As projects complete, the number of new orders remains weak. Concerns about insolvency risks remain high and continue to delay current and new development schedules.
House building has fallen markedly over the last year, although the pace of decline is slowing. Housing associations continue to reduce new builds, constrained by higher costs and the need to redirect budget towards repairs and upgrading, for example damp has been a bigger problem as tenants are using less heating. Commercial development continues to slow, though not to the extent seen in the housing sector. The higher cost of funding is deterring most speculative activity and confidence remains weak. The infrastructure sector has seen more deferrals and cancellations of large new projects.
Those contacts with projects that already have consent may see a pickup late in the year. Beyond then, contacts cite slow and increasingly complex planning applications and approvals as a likely drag on the pace of growth.
Corporate credit conditions
The credit conditions story remains consistent with previous updates. Credit supply remains constrained by the impact of the subdued economic outlook on corporate credit risk. Corporate debt appetite remains weak.
Debt markets are open for large corporates and banks continue to compete to lend to the most credit-worthy borrowers. Firms that struggle with profitability and lack security report access to finance is tight, though asset-backed finance is typically available. Fewer non-bank lenders are active as their funding is squeezed, leading to growth in high-cost, private credit. Private equity finance remains tight as do start-up and early-stage finance, with no recovery expected in 2024.
Contacts are generally deleveraging, using their own cash to fund investment. Demand for working capital finance remains stronger than that for capital expenditure. Remaining Bounce Back Loan Scheme obligations are still dampening the appetite of small firms.
Banks report limited signs of borrower distress. However, there are signs that the size of insolvencies is rising and is no longer limited to micro firms. Some contacts are concerned that insolvencies may be triggered by future refinancing events at a higher borrowing rate where there are lower collateral values.
Employment and pay
Contacts report that retention of employees is better, and that recruitment continues to get easier, although the labour market is still tight by historical standards. We are getting more evidence that average pay growth for 2024 will be lower than 2023 in line with the recent pay survey.
As in the last update, most firms are maintaining their current employment levels and the number of businesses reporting a reduction in head count remains low. Labour hoarding is still a common precaution against what is still perceived as tight labour market, by historical standards. However, a small number of businesses indicated that they are hoarding less labour than before as they perceive it to be less difficult to recruit in the future.
Churn continues to decrease, reflecting uncertainty in the labour market and firms holding fewer vacancies. Recruitment difficulties continue to ease although some local labour markets and sectors such as engineering, software and manufacturing continue to struggle. Contacts continue to report offshoring roles to ease constraints and/or investing in automation, including AI, in pursuit of labour efficiencies.
The easing of inflation expectations, a looser labour market and affordability concerns continue to be cited as factors driving lower pay settlements this year. Firms also have no intention of making one-off cost of living payments in 2024. To the extent that firms reported one-off payments in their wage bill, this would fall out of the annual comparison and be a downward influence on pay growth in 2024.
As expected, contacts in consumer services and goods continued to report higher pay settlements than other sectors given the proportion of their workforce impacted by the National Living Wage (NLW). Businesses expect to manage the NLW increase by eroding differentials and/or reducing headcount or hours, or by passing on labour costs into prices, though usually only partially.
Box A: Red Sea disruption
The situation in the Red Sea is having only a limited impact on retail prices so far.
Contacts tell us that the Red Sea situation has delayed shipments by two to three weeks from Asia to Europe and that container rates have increased, but that the impact is limited and nowhere near as disruptive as previous supply chain difficulties. Shipping routes from the US to Europe are unaffected. The goods that are impacted are typically bulky items and components, electrical, clothing and DIY.
The limited impact so far reflects weak global demand, a quieter time of year, and lower Chinese export demand ahead of Chinese New Year. Some containers are being shipped when less than full. Firms tell us delays of two to three weeks are manageable due to adjustments made since the pandemic. These include varying supply chains and holding more stock, although this ties up working capital.
Shipping companies are managing by using different routes and offering air freight, though this is costly. Ports have excess capacity and there are no shortages of trucks to get products from port to manufacturing or distribution sites.
Container rates have risen sharpy from around US$2,000 to between US$5,000 and US$8,000, depending on the size of the contact and other arrangements. This is still well below the US$17,000 to US$20,000 seen during the pandemic. It is too early to see any impact from this on retail prices – contacts tell us it will be April at the earliest. For some, the impact has been offset by lower input prices elsewhere or they have absorbed the increase in costs.
Contacts consider there are some upside risks if the Red Sea disruptions are protracted, especially importers of bulky items. But they expect any impact will be much less than the disruption caused to the supply chain by the pandemic. The upside risk to prices is difficult to quantify at present.
Costs and prices
The costs and prices story is little changed to that told in Box D of the February MPR. Inflation for consumer goods continues to unwind more quickly than for services, reflecting the high labour content in services prices.
Contacts continue to report the majority of input costs are either flat or falling compared to a year ago: energy contracts are repricing lower, raw material prices are falling as are factory gate prices in Asia. Until recently freight rates were also falling, though as described in the box on the Red Sea, are now up three or fourfold.
The easing in input costs is reflected in manufacturers domestic prices which have returned to normal in terms of frequency and magnitude of increases or in some cases no increases at all. Some contacts report being forced to reduce prices following reductions in energy or commodity prices or to remain competitive in the face of falling demand.
Business services price inflation continued to ease only moderately in the main, as wage inflation remains elevated. Marketing, public relations and logistics are the exception as falling demand has led to flat or falling prices.
Profit margins are still under pressure. Some contacts cite modest improvement as they attempt to hold onto the benefit of reduced input costs but the picture is mixed. The majority remain sceptical that normal margins can be restored this year given the outlook.
Consumer goods inflation continues its broad-based easing. The large supermarkets expect food inflation to be around 4% by spring and 3%–4% for the remainder of 2024. Non-food inflation is returning to ‘normal’: clothing and footwear 2%–4% and general merchandise 3%–4%. Estimates for new car inflation in 2024 are low single digit and recently used car prices have been falling more sharply than normal. Prices are falling for bulky retail items such as furniture, where input costs have unwound and/or demand has been week.
In aggregate, Agents judge that consumer services inflation is moderating but more slowly than for goods. This reflects the high labour content in services prices. However, there are a range of experiences across different firms and sectors. Many businesses anticipate that they will be less able to pass on increased labour costs into higher prices in 2024 than they were in 2023. This is especially the case in sectors where demand is fragile, such as leisure attractions. In sectors where demand is holding, typically premium services or value-based services, firms are able to push price increases through to cover wage demands. But there are also firms facing falling demand, typically hospitality, who due to already slender margins are being forced to try and recover costs at the risk of further weakening demand. Retailers cite potential upside risks to inflation coming from the NLW, changes to business rates and Red Sea disruption.
Property
Sentiment continues to improve among housing contacts, who now think house prices may have bottomed out. In contrast, investment in commercial real estate continues to be subdued due to the interest rate environment, with increased reports of financial distress being deferred by lending forbearance.
Housing market
The sentiment of our estate agency contacts continues to improve, as there’s a growing sense that house prices have bottomed out and are now expected to stay flat or grow modestly over the next few months. Contacts report that the reduction in mortgage rates is supporting demand.
House builders are making more use of incentives to support sales and defend headline prices and are very cautious about their build plans for the year ahead. Even so, some are reporting very early signs of an improvement in demand, again attributing this to more supportive mortgage rates.
In the rental market, demand remains strong and stock limited, pushing rental prices up although some contacts tell us that the rate of increase is moderating. A few landlords and housing associations are reporting moderate increases in arrears.
Commercial real estate
Investment activity – transactions and development – is broadly flat compared to this time last year and remains very weak, by historical standards. Contacts continue to cite the interest rate environment as the reason for this and expect activity to increase only once monetary policy becomes less restrictive.
Bank forbearance on lending is avoiding a material increase in distressed or forced sales and the realising of market transaction values that would generate financial distress. This issue is concentrated among the challenger banks, given established lenders’ more cautious lending practices for commercial property.
Prime office and favourably located industrial properties are still seeing some growth in rents and valuations. Elsewhere in the sector, rents and values continue to be reported flat at best.
Outreach engagement
The overall mood of households is pessimistic due to the price of essentials and the end of fixed-rate mortgage deals. Charities’ resources are under pressure: financial reserves are shrinking, and staff and volunteers are stretched to their limits to meet demand.
Households are continuing to cut discretionary spending to maintain a core standard of living. Some report they are also taking up overtime to cover higher living costs. Others are concerned about job insecurity. Concerns about inequality and a generational divide persist. Some report reduced incentives for career progression. Choice in payment options remains important to individuals, including access to physical cash and the ability to use it. There remains low awareness of a potential digital pound among households.
Charities tell us that the Household Support Fund (HSF) has enabled charities to offer quick, unrestricted solutions to many people who are facing difficulties due to the increased cost of living. With the HSF ending, they are concerned that some might face unemployment, homelessness or fall deeper into poverty without the small pockets of support they currently receive. Charities are increasingly finding that they need to offer more services to a wider range of people, and attribute this to cuts in local funding and services. They report that many living in poverty face complex issues and consider that employment and a stronger labour market by themselves are not sufficient solutions.
