Overview
This publication summarises intelligence from the Bank’s Agents considered by the Monetary Policy Committee (MPC) at its September meeting. The intelligence was gathered in the six weeks to 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.
For the most part, economic developments remain largely the same as at the previous update set out in the August Monetary Policy Report (MPR). Improving real incomes, the August Bank Rate cut and anticipated further cuts seem to underpin improving sentiment and expectations of increased activity in 2024 Q4 and into 2025 across most sectors.
Demand for consumer goods and services remains subdued. However, contacts are still hopeful that consumption growth will pick up in the autumn. Investment intentions continue to gradually improve. Contacts again report little annual growth in goods export volumes but expect it to pick up somewhat heading into 2025. Annual growth in services export values remains steady.
New corporate credit demand is gradually picking up from a low base. There is further evidence of improvement in the supply of credit to corporates.
Sentiment in the housing market has improved since the August rate cut, although housebuilding activity shows no signs of improvement yet. Rent inflation continues to moderate.
Manufacturing volume growth remains weak, although contacts continue to expect a modest pickup in volume growth through 2024 Q4 into 2025. The rate of decline in construction output compared with a year ago continues to ease, and sentiment in that sector has improved, driven by the cut in Bank Rate and the new Government's comments on new higher housing targets. Business services saw continued very modest annual growth in volumes, though a further easing in price inflation meant a slowing in growth of revenues.
Employment intentions remain slightly positive, in line with the August MPR. Recruitment conditions continue to ease back to ‘normal’. The Agents’ latest intelligence suggests expected employment-weighted pay settlements for 2024 will average around 5.5%, a touch lower than 5.7% at the time of the August MPR. This is driven by settlements agreed/expected for July–December – which, generally, cover businesses less affected by the National Living Wage (NLW) – which look to have eased back to average around 3.7% (from around 4% in the last round).
In the face of weak demand, and as labour markets have loosened, capacity utilisation has been falling and is now at normal levels on average across firms.
Cost and price developments are much the same as in the previous update. Consumer goods price inflation continues to dissipate and is now at very low levels, though risks around Red Sea disruption remain a concern for some. Consumer services price inflation remains high as wage growth eases only slowly. Contacts expect pressures to continue abating as wage growth falls further.
Consumer spending
Households’ discretionary spending remains weak, with poor weather in June and early July contributing to continued subdued demand across goods and services. Contacts are hopeful that annual real consumption growth will pick up in 2024 H2 given the better weather, improving real incomes and the cut and expected further reductions in Bank Rate.
Supermarkets have benefited from major sporting events this summer, but consumers continue to be focused on promotions and value brands.
Retailers continue to report flat or slightly weaker volumes on last year and are not expecting much of an improvement in volumes until 2025, but they are optimistic that loosening monetary policy will slowly improve consumer confidence and sales. Summer clothing sales have been adversely affected by the poor weather and consumers switching from cheaper domestic fashion brands to even cheaper imported Chinese substitutes. In contrast, health and beauty firms continue to do well. Demand for household and garden equipment remained weak as consumers are still reluctant to spend on discretionary items. New car sales including for electric vehicles (EVs) are down on last year, while second-hand car sales are seeing growth on last year, as are after-sales services.
Demand for consumer services remains subdued, with volumes generally reported to have been flat or slightly lower relative to a year ago. Pubs and restaurants report negative annual volume growth, driven in part by the poor weather over the first part of the year. Consumers substituting towards cheaper dining establishments has supported demand in cafes and takeaway outlets to some extent, but many of the larger chains have also seen significant annual volume reduction.
The poor weather has also led to significant volume reduction at visitor attractions and the types of domestic accommodation more exposed to the weather. These have also suffered from consumers taking fewer short breaks. Hotel occupancy appears to have been broadly flat over the last year. In contrast, demand for services ancillary to foreign holidays remains very strong, with airports generally reporting double digit growth in passenger numbers, often above pre-pandemic levels.
Consumer credit demand generally appears robust, except for online fashion. Arrears have increased but remain at low levels as consumers use pandemic savings to pay down debts.
Investment
Overall, investment intentions continue to gradually improve and are positive for the year ahead, though there are some for whom the outlook remains highly uncertain.
There are some further accounts from a variety of sectors of high labour costs incentivising investment in automation. This is typically to reduce the need to recruit future employees rather than reduce current headcount. Investment in renewable energy or other sustainable technology continues to motivate spend. Business services firms continue to spend on technology and on office refits in response to post-Covid ways of working.
Non-labour cost inflation is mentioned less frequently as a deterrent to investment. However, persistent high costs, combined with planning delays, continue to deter construction projects. Those contacts who most frequently cite low demand and margin pressures as a deterrent to investment are in consumer services, notably tourism and hospitality and higher education. Across sectors, intentions continue to be more subdued for those who borrow to invest or are seeking to deleverage and the Agents are hearing some first examples of firms who have successfully deleveraged and are now restarting investment.
Trade
Contacts report that annual growth in services export values remains steady and expect that to continue. Annual growth in export volumes of goods remains around zero but is expected to pick up modestly in 2024 Q4 and into 2025.
Exports of architectural, surveying and consultancy services are strong, helped by construction projects in the Middle East. Growth in demand for legal services remains firm. Inward tourism numbers are up slightly compared to this time last year but are still lower than pre-Covid levels. London visitor attraction numbers are softer. International student numbers are lower compared to this time last year.
Strong growth in aerospace, defence, pharmaceuticals, equipment for data centres, and more widespread restocking, is supporting growth in exports of goods. However, automotive output growth is moderating, and exports of construction machinery and related components are down compared to this time last year.
Some contacts expect exports to the EU to pick up somewhat, but some still cite post-Brexit frictions along with other regulatory changes as inhibitors of UK trade with the EU.
Business and financial services
Continued very modest annual volume growth and a further easing in price inflation has led to growth in business services revenues easing a little. However, contacts anticipate further cuts in Bank Rate will increase activity and lead to increased revenue growth into 2025.
Professional services firms report steady revenue growth driven by reasonable, but weakening, fee growth and modest, but rising, volume growth, as some corporate transactions, such as mergers and acquisitions, have increased slightly. While this means some increase in the demand for funding, overall corporate financing activity remains flat on a year ago. Contacts expect potential changes to business tax, such as Capital Gains Tax, will support demand in the near term for professional and financial services.
Firms’ discretionary spending on advertising and marketing, corporate events, hospitality and travel continues to rise slowly. Owing to continuing overall weakness in construction, those services supporting the sector are reporting a fall in revenues. The exception is engineering services linked to energy and utility projects, which are growing strongly. Demand for recruitment agencies has fallen markedly on last year as the labour market loosens. Logistics and haulage activity remains flat. Other than on artificial intelligence and cyber security, there has been less spending on IT services.
Manufacturing and production
Manufacturing volume growth remains weak, but contacts continue to predict a modest pickup in the pace of growth through 2024 Q4 into 2025.
Suppliers to the aviation and defence sectors have strong current and forward orders. Renewable energy-related product demand continues to grow. Pharmaceuticals production is up on last year, although much is for export. Food and drink output is up slightly on last year, though more so for retail than services.
Vehicle output growth continues to moderate as private EV demand grows slower than forecast, and demand for parts has fallen. Other durable goods output remains lower than a year ago. Construction machinery and materials output remains weak. Output in the electricity sectors is down on this time last year as energy-saving measures have become more widespread. Agricultural output is also below last year and could remain so owing to the challenging weather.
Construction
The annual rate of decline in construction output continued to ease. Government comments on new higher housebuilding targets and planning reforms, and the recent and expected future cuts in Bank Rate have improved sentiment, with growth expected to return in 2025.
Private housebuilding activity is modestly down on this time last year. But with some contacts noting a return to growth it seems to be getting closer to stabilising. Social housebuilding activity continues to fall, as Housing Associations (HAs) face continuing funding pressures. Repair, maintenance and improvement activity continued to grow on last year owing to diverted HA spending and office refits reflecting post-Covid usage patterns. New commercial development is still down on last year, particularly traditional office space, though demand for warehouses and data centres remains robust.
Across sectors, contacts continue to cite the high interest rate environment, elevated building costs, labour shortages, and planning delays as constraints to growth in construction.
Corporate credit conditions
Contacts report further evidence of a mild improvement in credit supply and that new credit demand is also picking up, though from a low base.
Competition continues among banks to lend to the most creditworthy businesses. Contacts report there is greater willingness to lend to businesses for investment purposes, given an improved economic outlook. Mainstream banks are showing greater appetite for mid-market lending and there are signs of rising mid-market private equity activity and of more appetite for tech and early-stage finance, from a low base. Access to credit is still a challenge for small and medium enterprises and remains difficult for firms with high debt, low profitability or limited security.
Most demand for new borrowing continues to be for working capital or cash-flow purposes. But there are increasing examples of firms borrowing to fund investment. Contacts report more instances of successful refinancing, following a period of deleveraging, as interest costs ease from recent highs.
Cash flow remains tight in many sectors (for example, construction, logistics, energy-intensive production and consumer facing) with trade-credit insurance cover often reduced as insurers perceive the risk of non-payment of invoices in these sectors to have increased. Insolvencies continue to be dominated by small firms and are expected to plateau in 2024 H2.
Insurers are reducing cover in response to perceived increased risk/vulnerability in certain sectors and at certain firms. (ie risk of non-payment of invoices has risen, which is what trade credit insurance covers.)
Employment and pay
Overall intentions point to a modest increase in employment, with a slightly higher net balance of contacts this round expecting to grow headcount over the coming year.
Business services, transport and wholesale sectors expect to expand headcount over the next year. Other sectors are expecting employment levels to remain steady or are looking for small headcount reductions through natural attrition. While these firms are still not generally replacing leavers, there are very few mentions of potential redundancies. Many contacts report having maintained headcount in anticipation of demand picking up. For the longer term, contacts continue to focus on productivity improvements consistent with investment intentions to increase automation.
Recruitment difficulties continue to ease back to levels contacts would consider ‘normal’ and churn is lower. Nonetheless, there remain pockets of skills shortages in some professions and within some geographic areas. Many contacts note that the increase in salary requirement for employees with visas will mean recruiting from abroad will no longer be economically viable with some using apprenticeships or in-house training to tackle these issues in the longer term.
The Agents’ latest intelligence suggests expected employment-weighted pay settlements for 2024 will average around 5.5%, a touch lower than 5.7% at the time of the August MPR. This is driven by settlements agreed/expected for July–December – which, generally, cover businesses less affected by the NLW – which look to have eased back to average around 3.7% (from around 4% in the last round).
Contacts have not yet decided on pay awards for 2025, but they expect that pay inflation will fall back to more ‘normal’ levels of around 2%–4%. Firms exposed to the NLW remain concerned about a potential further increase in 2025, with a small number noting upwards pressure to restore pay differentials. Contacts not affected by the NLW cite relatively high pay awards in 2023, looser labour market conditions, lower current and expected inflation, and affordability or weak demand as the drivers for lower settlements than last year.
Costs and prices
Consumer goods price inflation continues to dissipate and is now at very low levels, though risks around Red Sea disruption remain a concern for some. Consumer services price inflation remains high as wage growth eases only slowly. Contacts expect pressures to continue abating as wage growth falls further.
Raw materials costs have fallen slightly, on average, over the past year. Imported finished goods costs have stabilised and some have fallen back a little where demand is weak. Contacts importing from the Far East are concerned about rising shipping costs from the Red Sea disruption.
Manufacturers’ domestic prices are broadly flat on a year ago. Where prices have risen, the increase is within more normal ranges than over the past couple of years. Business services price inflation remains higher than normal. but it is gradually easing, in part as clients push back harder against increases.
Profit margins remain squeezed. As inflation abates and there are fewer pockets of excess demand, business and consumers are more resistant to price increases than last year. There is some relief from falls in energy costs, but less so for services firms, some of whom are looking for efficiencies, changing product mix or cutting back on discretionary spending.
Consumer goods price inflation has fallen to very low levels. Food price inflation has fallen back quicker than many had expected and is expected to remain around 1%–2% over the rest of the year, despite expected upward pressure on some commodities prices. Furniture and household goods prices have stabilised or fallen back modestly in some cases. New and used car prices have fallen because of discounting in the face of lower demand. The benign materials cost environment means consumer goods price inflation is expected to remain very low. The main risk comes from the rise in shipping costs from the Far East, which so far has been absorbed through a further squeeze on margins.
Consumer services price inflation is falling more slowly than for goods. Some hospitality and leisure contacts have had to resort to quite heavy discounting this summer, while others have seen demand and held prices firmer. Businesses across consumer services are balancing a desire to pass on high wage growth against a fear of pricing themselves out of price-sensitive markets. As wage growth is currently falling slowly, a more pronounced easing in consumer services price inflation may not be seen until next year, when indexed price increases will also be lower than this year. With a high proportion of lower-paid staff in this sector, a key factor will be the extent of next year’s rise in the NLW.
Property
Sentiment is improving in both the housing and commercial property markets, though for both this has yet to translate into substantial increases in activity.
Housing market
The recent cut in Bank Rate has led to improved sentiment in the secondary housing market and supported expectations of further reductions. Contacts tell us this has yet to be reflected in agreed sales or prices. While they are a little more positive now than over the last few months, expectations for price increases are still in the low single digits.
Housebuilding activity remains very weak, and most contacts do not expect an immediate pickup. While especially the case in south and south-east England, contacts elsewhere in the country also report low levels of activity and the use of incentives to support sales. HAs across the country continue to dial down their building plans. Some contacts expect the impact of the recent rate cut on demand will be felt after the regular summer lull.
Rent inflation continues to moderate with most contacts now expecting it to end this year in high single digits, much lower than in 2023. Some attribute this moderation to affordability constraints. Others argue that as expectations of further cuts in Bank Rate grow more potential renters are considering buying instead.
Commercial real estate
Contacts report that transaction volumes have increased marginally from very low levels compared to this time last year and expect further increases over the coming year. They attribute this to improving confidence in a stable outlook and the UK being looked upon more favourably by foreign investors relative to other European locations.
There is growing concern about how debt exposure to non-prime retail and office property will be addressed over coming years. Contacts tell us that debt is being rolled over on property valuations that are far removed from true market values and will not recover, leaving lenders exposed.
Outreach engagement
Household participants in Bank outreach events tell us that budgets continue to be squeezed due to the hight costs of household essentials. A debt advice charity reports that of the people they help with debt advice, more than half have insufficient income to cover essential costs.
Many participants cite high prices and stagnant real wages as the main issues they face. For many, rising mortgage and rent costs – out of proportion with the increases in their real incomes – were eating up a larger chunk of their income forcing them to make tougher spending choices or take on debt to cover other expenses. Some older participants shared that their adult children were still living at home due to high housing costs or that they were helping them with their mortgage payments. Some were more positive about the future and felt the change in Government would help to bring down living costs.
Foodbanks continue to report significant reductions in donations with at least 60% of food having to be purchased, but demand is still high. Some are starting to implement regional distribution hubs and pooling resources to ensure that smaller foodbanks and support organisations remain open. Hygiene poverty continues to rise and is stopping people from seeking employment. Although there are fewer people needing help with prepayment meter top-ups than in 2023, numbers are still much higher than previous years and expected to increase again this autumn and winter.
