Overview
This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee (MPC) at its June meeting. The intelligence was gathered in the six weeks to mid-May. The Agents’ scores published alongside this document generally represent developments over the past three months compared with the same three months a year ago.
Contacts report a pick up in consumer demand in 2024 Q2, following a wet April, though they consider that consumer caution is still a drag on growth. Despite this, contacts continue to display the same optimism as they did in the previous round that quarterly volume growth of consumption will pick up in the second half of the year, in line with the May Monetary Policy Report (MPR). Investment intentions seem to have bounced back to marginally positive levels from their dip at the last update. Growth in services export values persists, while growth in goods export volumes remains negative.
Output side contacts remain cautiously optimistic of growth recovering this year, in line with the May MPR. Overall, manufacturing volumes have stopped falling compared to the same period last year and contacts expect a return to modest growth later in 2024. The rate of decline in construction output is easing but any improving sentiment is not expected to translate to activity until later this year. Business services contacts continue to expect volume growth to strengthen through 2024.
Employment intentions have edged up slightly since the last round but are consistent with very low employment growth over the next 12 months, broadly in line with the May MPR. Recruitment difficulties continue to ease, although they remain tighter than normal for highly skilled roles in particular.
Intelligence gathered since the beginning of the year implies pay settlements averaging 5.7% in 2024. Although this is down from the average of 6% seen in 2023, it is a little above the 5.4% suggested by the Agents’ pay survey, first reported on in the February MPR. Contacts continue to cite National Living Wage (NLW) pressures as an influence on settlements, particularly in the consumer facing sector where settlements average about 7.5% compared to about 4.5% for non-consumer facing.
Cost and prices intelligence suggests CPI inflation will continue to moderate gradually. Materials cost deflation is still helping goods price inflation slow more quickly than that of services, where firms are having to balance pass through of wages or reducing costs and quality of service to maintain margin, with concerns about reducing customer demand.
Consumer spending
Contacts report a pick up in demand for goods and services in Q2, following the weakness of Q1, which was partly weather-related. They also tell us that while consumer caution is still a drag on growth, they remain optimistic that rising real incomes, potential cuts to Bank Rate and major summer sporting events will lead quarterly volume growth to pick up further this year.
Supermarkets report that discounts and a robust ‘eat-at-home’ trend continue to support grocery volumes. There are tentative signs of a return to brands in response to promotions and as cost-of-living pressures moderate.
Demand across retail is still subdued with contacts anticipating it will take time for rising real incomes to make consumers feel less cautious about discretionary spending. Demand for electrical appliances seems to be returning to a normal replacement cycle after being disrupted by the pandemic, but demand for big ticket household goods and home improvement products remains weak.
Higher finance costs and falling used-car prices continue to weigh on demand for new cars. Demand for electric vehicles is especially weak, reflecting cost/range/charging/regulatory concerns, so some manufacturers may restrict total car sales to meet required EV targets (as a percent of total sales).
Following a weaker than expected Q1, pubs and restaurants are seeing a modest increase in demand compared to this time last year, often driven by discounts and offers. Consolidation in the sector has helped to support demand for those that remain. Hotels and accommodation report soft but steady demand growth, although it is very price sensitive. Room occupancy has improved since March compared to a year ago, but auxiliary spend on food and drink is still weak. Demand for domestic summer holidays is currently about the same as last year and very price sensitive. Travel companies and airports report growth in demand for overseas main holidays, but it is weaker for short breaks. Visitor numbers for recreational days out have recovered to pre-pandemic levels, driven by discounts and offers.
Investment
An overall slightly more positive sentiment is emerging from the range of investment intentions gathered this round compared to March.
The range of views reflects mixed sectoral outlooks. Some sectors such as defence are increasing spend while other sectors facing weak demand prospects such as some parts of consumer services or higher education are cutting back. In general contacts’ uncertainty over the economic outlook is easing, although financial constraints including the cost of finance and margin pressures continue to weigh on some.
Greater efficiencies and automation continue to be cited as the reasons for investment, occasionally linked to higher labour costs. Even firms with less scope to automate such as retailers are still pursuing it where they can, for example by installing self-service facilities. Mentions of artificial intelligence (AI) are increasing, though it tends to be to improve efficiency and customer service, not necessarily to reduce headcount.
Trade
Annual growth in the value of export services remains steady and contacts expect this to continue. Annual growth in the volume of goods exports remains slightly negative, but contacts expect it to improve slowly over this year and consider a strong pick up unlikely until 2025 and the EU economy strengthens.
Exports of professional services such as those linked to renewable and energy projects and architecture maintained strong growth. The number of tourists from the US and associated spend fell back from previously high levels, outweighing a pick up in Asian tourists. Tightened visa rules continue to significantly reduce high value intakes of overseas students from Asia and Africa.
Chinese and EU demand remains weak for UK goods such as food and construction. Demand from the rest of Asia and the Middle East remains robust. There were a few reports of the pending US election slowing previously strong sales growth. Defence and aerospace exports continue strongly.
Reflecting weak UK construction, imports of aggregates remains down compared to this time last year. Food imports are up due to poor UK harvests.
Business and financial services
Business service revenue growth continues, mostly down to price increases. Although expectations have been tempered by geo-political uncertainties, contacts expect moderate growth in volumes through 2024.
Professional services remains the area with strongest revenue growth, although fee growth has eased. Strong demand remains for litigation, audit, and tax services. Restructuring work has not picked up as much as expected and corporate finance deals remain weak. Reductions in firms’ discretionary spend has limited revenue growth in advertising. IT services activity has increased following a more subdued start to 2024 and client firms continue to focus on digitisation, cyber risk and AI. Sentiment among recruiters is improving as hiring activity picks up. Demand for corporate hospitality continues to strengthen modestly, but price sensitivity remains. Logistics firms report that volumes are down overall with weak demand from the construction and food and beverage sectors.
Manufacturing and production
Overall, manufacturing volumes have stopped falling and are now broadly the same as they were a year ago, though the underlying picture is mixed.
The defence and aviation sectors continue to perform strongly as have manufacturers of medical devices and consumables who report good output growth. There has been a slight pick up in ‘value’ food and drink production in response to consumers trading down. These positives are offset by manufacturers of consumer durables and those that supply the construction industry, whose output is down on a year ago, owing to the weakness seen in the construction sector and the weak housing market.
Manufacturing contacts anticipate modest growth towards the end of this year as the sectors that they serve, such as construction also recover. Farming yields are likely to be lower given the effects of previous bad weather.
Construction
The pace of annual decline in construction output continues to ease. Sentiment is improving further and more contacts are anticipating higher output towards the end of the year, aided by stabilising costs and the expected easing in Bank Rate.
Private housebuilding remains down compared to the same time last year, but smaller housebuilders reported a modest improvement in 2024 Q2 on 2024 Q1. Large private developers are focusing more on social housing to maintain output until private demand picks up. Even so, the building of new social housing continues to fall.
There are fewer public sector projects starting owing to budget constraints, though this is partially offset by utility and core infrastructure developments. Repair and maintenance remains stable across the public sector, social housing and private households. Refurbishment of older buildings continues in pursuit of lower running costs and improved energy ratings.
Commercial development continues to fall modestly compared to the same time last year. Higher funding and build costs mean new project deferrals continue. Confidence remains subdued owing to sub-contractor failures and long planning processes.
Corporate credit conditions
Credit conditions are little changed, though a few firms in ‘vulnerable’ sectors that have recently been trading better report slightly improved bank lending appetite.
Contacts report that credit supply conditions remain the same. Debt markets are open and private debt funds are active. Lending to the largest borrowers with the lowest credit risk continues to be very competitive. Smaller firms that present greater credit risk report tight access to bank finance, though challenger banks and non-bank lenders are more willing to lend at high interest rates. Private equity finance remains tight as does start-up and early-stage finance.
Weak demand continues for new lending at current interest rates. Companies are focusing on refinancing existing loans or are keen to reduce debt. Some firms especially in the property sector are waiting for rate cuts, but don’t expect much boost to credit demand given interest rate expectations have risen compared to the start of this year. Demand for finance is still stronger for working capital than for capital expenditure.
Employment and pay
The labour market has evolved marginally since the last update, with contacts continuing to report a loosening labour market, though they still characterise it as tight by historical standards. Pay settlements in 2024 have been lower than in 2023, although downward pressure on wages has been somewhat masked by the impact of the NLW.
Overall employment intentions have edged up slightly since the last update and now point towards low (rather than no) employment growth in the next 12 months. Although a sizeable minority of firms still expect headcount to remain stable, those looking to recruit are doing so on the back of an improved demand outlook, eg in professional services, pharmaceuticals and aerospace. Any growth in headcount will be at a lower rate than growth in output owing to past investment in automation, improved productivity and previous labour hoarding.
Contacts report that the difficulty in recruiting has eased to near pre-Covid levels but that it remains historically high. Churn has decreased further, owing in part to economic uncertainty increasing caution for higher-skilled workers to move roles. Some firms have resorted to recruiting from abroad or offshoring roles due to remaining skill shortages in engineering, software, legal and finance.
Intelligence gathered since the beginning of the year implies pay settlements averaging 5.7% in 2024. Although this is down from the average of 6% seen in 2023, it is a little above the 5.4% suggested by the Agents’ pay survey, first reported on in the February MPR. This reflects downward pressure from a looser labour market and lower inflation and inflation expectations. The NLW remains the key driver for settlements in consumer-facing sectors which average around 7.5%, compared to around 4.5% for non-consumer facing sectors. Firms will look to contain the wage bill through reducing differentials, reducing hours, increasing use of automation (some early adoption of AI) and partial cost pass-through. Although there remains upwards pressure from employees seeking to recover real pay erosion, alongside union pressure, agency intelligence suggests pay settlements happening in the second half of the year will be lower. Early indications point to materially lower pay awards in 2025.
Costs and prices
Owing to materials cost deflation, goods inflation continues to ease more quickly than services inflation, which is held up by a higher labour component in costs and higher wage growth. Contacts’ profit margins remain under pressure as they aim to achieve some cost pass-through without, in doing so, reducing consumer demand.
Input costs remain flat or falling, reflecting downward pressure from weak global demand and lower material and energy costs. Some materials such as chemicals and steel are significantly down on a year ago and are expected to continue to decline. Easing input cost conditions allow manufacturers to limit price increases to retain price conscious customers, while protecting their profit margins. Importers of finished goods report stable or falling costs, partially offset by the Red Sea disruption, which is now less frequently cited as a concern than a few months ago.
Business services contacts expect lower price increases this year than last as historically high demand eases and wage inflation moderates. Higher price inflation is reported in more NLW-dependent sectors such as Facilities Management.
Contacts are looking to maintain profit margins; however, their ability to do this is dependent on the demand outlook in their sector. There is a mixed story across sectors, with some contacts expecting margins to erode marginally this year.
Consumer goods inflation continues to fall across most sectors. Supermarkets and food producers expect food price inflation to be below 2% by year-end, down from 2–3% in the last update. Household goods retailers report broadly flat prices as lower wholesale costs are offset by higher labour costs. Contacts judge that consumer spending is holding up, but consumers are increasingly focused on value, leading to more promotions and discounts. New car price inflation continues to moderate and used car prices are now significantly down compared to a year earlier owing to normalising supply and softening demand.
Consumer services inflation continues to moderate more slowly than for goods, owing to this sector’s higher labour component in the cost base and higher wage growth. Input cost deflation and lower energy prices continue to help in gradually reducing expected price increases, but service sector pay settlements are likely to remain elevated and ease only moderately this year. Even within the service sectors firm experience differs, eg accommodation and catering providers are able to partially pass-through cost increases, whereas recreational service firms seem less able to do so. Many businesses are concerned that raising prices too much or reducing quality could quickly lead to lower sales volume from value focused consumers. This has reduced their ability to pass-through cost increases.
Property
Agents’ intelligence suggests the housing market has stabilised but remains very sensitive to expectations of rate movements. Commercial real estate transactions have stopped falling and grown slightly on a year ago.
Housing market
Contacts report that the housing market is stable in terms of the number of transactions and level of demand. Some even compare it to the ‘normality’ of pre-covid. Though demand remains very sensitive to mortgage rate expectations, most contacts are not anticipating a substantial increase in demand. This can also be seen in housebuilders’ subdued development plans and continued use of moderate incentives to encourage sales. Most contacts expect prices in the year ahead to grow by up to 2%.
Contacts tell us that supply into the rental market is improving slowly, and demand is moderating, with the consequence that rental price inflation is slowing. Although most still characterise the rental market as being in excess demand.
Commercial real estate
Transaction volumes are reported to have grown slightly compared to a year ago and are expected to grow more quickly over the coming year. Contacts attribute this to a currently stable – and likely falling – outlook for debt costs and reports that banks have reduced their tolerance for forbearance.
Within the occupation market, contacts suggest two tiers. For good quality, well-located stock of all kinds, rents and values are stable or increasing, while for less desirable retail and office stock the vacancy rate is still increasing.
Outreach engagement
Households tell us their budgets continue to be squeezed and that they feel uncertain about the economy. This story is reflected in the experience of charities that continue to cite increased demand for their services.
The high costs of household essentials means that budgets continue to be squeezed with housing costs as the largest expenditure. Households report being unable to save or able to save only a very little. A few have gone into debt to support others and themselves, with some using credit cards to pay bills. They felt the external and sustained shocks to the economy over recent years has made it hard to recover and as a result they are more cautious in their spending.
Those working say their salaries have risen a little but that this has been eaten up by additional household costs. Caution over the economy and the desire for security mean that they were unlikely to try and move jobs.
The messages from households are echoed by the charities that serve them. Advice and debt services report an increase in users of their services with a few reporting they are at capacity and cannot meet demand. They tell us that as well as turning to credit cards, many households are taking loans, legal and illegal, to pay their bills. There has been a large increase in the use of ‘buy now pay later’ schemes.
Demand continues to rise for other services, especially from foodbanks. They report that hygiene poverty is rising, leading to some children not attending school, adults not going to work and growing isolation among an already isolated part of society.
